A plain 10-point check anyone can run before writing a cheque.

Investing in a listed company is easy to research. The price is on a screen, the results are published every quarter, and a hundred analysts are arguing about it in public. A private company gives you none of that. There is no live price, no crowd of watchers, and often no more than a well-designed deck and a confident founder sitting across the table. That is exactly why private deals can be so rewarding — and so unforgiving. The information gap is the opportunity, and it is also the risk. The good news is that you do not need a background in investment banking to do this properly. Most of the money lost in private deals is lost to things that were visible before the cheque was signed, sitting quietly in filings, bank statements and one uncomfortable question nobody asked.

Here is a ten-point check you can run yourself, in plain language, before you commit anything.

1. Start with the real reason they are raising money

Every founder has a rehearsed answer to this: growth, expansion, scale. Your job is to find the unrehearsed one. Money raised to build something new is a very different proposition from money raised to plug a hole, repay a loan that has gone bad, or pay off an earlier investor who wants out.

Ask for the use-of-funds plan in writing, then compare it with the last two years of accounts. If the company is raising an amount that looks suspiciously close to its overdue payables or its next loan repayment, you are not funding growth — you are funding survival. That can still be a good deal, but it should be priced like one.

The quiet tell: urgency without a deadline. When a founder needs the money this month but cannot explain what happens on the first of next month, something is already overdue.

2. Check whether the business makes money on a single sale

Before you look at the total revenue, look at one unit of it. One customer, one order, one subscription. What does the company earn on it, and what does it cost to deliver it and to win it in the first place?

If a single sale does not make money, a million sales will not fix that — they will only make the losses arrive faster. Plenty of businesses grow revenue beautifully while every new customer digs the hole a little deeper. Ask for the cost of acquiring a customer, the profit made on that customer over time, and how long it takes to recover the acquisition cost. If nobody in the company can answer this, that is your answer.

3. Test whether the revenue is real and whether it will come back next year

Revenue is not one thing. Revenue that repeats every month under contract is worth far more than revenue that came from three lucky deals. So separate it: how much is recurring, how much is one-off, and how much depends on a handful of customers?

Concentration is the number to watch. If the top two or three customers make up most of the sales, you are not investing in a company — you are investing in a relationship, and usually one that is not yours. Ask how long those contracts run, when they were last renewed, and whether they are on paper.

The quiet tell: a sudden jump in sales in the year immediately before the fundraise. It happens too often to be a coincidence. Check whether the jump came with matching cash collections, or only with a bigger receivables figure.

4. Follow the cash, not the profit

Profit is an opinion; cash is a fact. A company can report a healthy profit and still be unable to pay salaries, because the profit is sitting in unpaid invoices and unsold stock.

Take the reported profit and compare it with the cash actually generated from operations over three years. If profit keeps rising while operating cash flow stays flat or negative, ask why, and keep asking. Then look at the ageing of receivables — how much of what customers owe is more than six months old — and at inventory. Old receivables and rising stock are where profits go to disappear.

5. Look for what is not on the balance sheet

The balance sheet tells you what the company owns and owes. It does not always tell you what the company has promised. Guarantees given for a director’s other business, disputed tax demands, pending legal claims, penalties, unpaid statutory dues, commitments to buy — these live in the notes to the accounts, in the fine print, or nowhere at all.

Two documents settle most of this quickly. First, the public registry filings, which show who has a charge over the company’s assets — in other words, which lender gets paid before you do if things go wrong. Second, the contingent liabilities note in the audited accounts. Read both. They are boring, and they are where the surprises live.

6. Understand what you will actually own after the deal

Investors focus on the percentage they are being offered and forget to ask what happens to it later. There is usually an employee share pool waiting to be issued, sometimes convertible instruments from an earlier round, occasionally a promise made informally to an adviser or an early backer.

Get the current shareholding, the fully diluted shareholding, and the terms of every earlier round. Pay particular attention to preference rights — arrangements where earlier investors get their money back first when the company is sold. In a modest exit, those rights can absorb almost the entire sale value, leaving later shareholders with a nominal amount despite owning a healthy-looking percentage on paper.

7. Test whether the numbers can be trusted

Not all accounts are equal. Audited financial statements carry more weight than management-prepared ones, and consistency matters more than perfection.

Compare the figures the founder shows you in the deck with the figures actually filed with the registry. They should match. If they do not, ask for the reconciliation, and be very careful about the answer. Look at whether the auditor has changed recently and why; auditors who resign in the middle of a term rarely do so for pleasant reasons. Read the auditor’s remarks rather than skipping to the last page.

The quiet tell: related party transactions. Sales made to a company owned by the founder’s family, rent paid to a director’s property at generous rates, loans moving between group entities. Some of this is normal. A lot of it is how private profit gets manufactured or quietly extracted.

8. Check that the company is clean where it is cheapest to check

Tax filings, employee dues, licences, registrations, past filings made on time. This is unglamorous work and it takes an afternoon. It is also the single highest-return hour you will spend, because unpaid statutory dues do not disappear — they compound, they attract penalties, and they land on the company after you have invested.

The same applies to litigation. Ask for a list of every pending case involving the company, its directors and its group entities. Then verify it independently rather than accepting the list at face value. A director disqualified elsewhere, or another company in the same group that has been struck off, tells you something about how this business is run.

9. Ask what happens if the founder disappears tomorrow

In most private companies, the founder is the business. They hold the customer relationships, the supplier terms, the pricing knowledge and the informal authority. That is fine while they are present and catastrophic when they are not.

Look for the second line. Is there a finance person who actually controls the books, or does the founder approve every payment personally? Are processes documented? Are customer contracts in the company’s name or the founder’s? And is there a shareholders’ agreement that stops the founder from starting a competing venture or walking away with the client list?

10. Decide how you get your money back before you put it in

This is the question amateurs skip and professionals ask first. A private shareholding is not something you can sell on a Tuesday afternoon because you have changed your mind. Your money is locked in until a specific event releases it: a sale of the company, a buyback, a listing, or a later investor buying you out.

Ask the founder directly what the exit path is and when. Then get your rights written into the shareholders’ agreement — the right to information, a seat or observer status where it matters, protection against being diluted unfairly, the right to sell alongside the founder if they sell, and a clear valuation method for any buyback. Rights that are not written down do not exist, however warm the relationship feels today.

The warning signs that should slow you down

Certain things are not deal-breakers on their own, but two or three together should make you stop. Reluctance to share filed accounts. Books maintained in spreadsheets rather than a proper accounting system. A valuation justified only by what someone else in the sector raised. Round-number financials that are just a little too neat. Frequent changes in auditors, directors or registered address. Personal and company expenses running through the same account. And the most underrated of all: a founder who becomes irritated by detailed questions. How they respond to your diligence is a preview of how they will respond to your oversight.

How much diligence is enough?

Scale the work to the cheque. A small angel ticket does not justify a full commercial review, but it always justifies reading the filed accounts, checking the registry, and having one hard conversation about cash. A larger investment deserves a proper financial and legal review by someone independent of the founder — including someone who reports to you, not to them. The cost of that review is almost always a small fraction of what it protects.

Frequently Asked Questions

How do I value a private company when there is no market price? There is no single correct number. In practice, value is triangulated: a multiple of sustainable earnings, a multiple of revenue for fast-growing businesses, what comparable companies have been valued at recently, and the present value of expected future cash flows. What matters more than the method is the quality of the earnings you are applying it to. A generous multiple on overstated profit is simply a larger mistake.

What documents should I ask for before investing? At minimum: three years of audited financial statements, the latest management accounts, the shareholding pattern before and after the round, all past investment agreements, bank statements for the last twelve months, key customer and supplier contracts, tax and statutory filing status, a list of pending litigation, and the registry filings showing charges on assets. If a founder will not share these with a serious prospective investor, you have learned what you needed to know.

Is diligence worth it for a small investment? Yes, but proportionately. The basic checks — filed accounts, registry search, litigation check, cash flow review — cost very little and catch most of the serious problems. Full-scope diligence is for larger commitments.

Can I rely on the numbers the founder shows me? Treat them as a starting point, not evidence. Every set of management numbers is prepared by someone with an interest in the outcome. Verify against filed accounts and bank statements. Where the two disagree, the bank statement usually wins.

What is the most common mistake first-time private investors make? Backing the person and skipping the paperwork. Conviction about a founder is a reason to investigate more carefully, not less — because that conviction is exactly what makes people sign documents they have not read.

How long should the process take? For a straightforward small investment, two to three weeks. For a larger or more complex one, four to eight. Any pressure to move materially faster than this should be treated as information about the deal rather than a reason to hurry.

How SRC Chartered Accountants Can Help

At SRC Chartered Accountants, we sit on the investor’s side of the table.

We carry out financial and tax due diligence on target companies — verifying the quality of earnings, testing whether cash genuinely follows profit, examining related party transactions, and identifying undisclosed liabilities and statutory exposures before they become yours. We review shareholding structures and the effect of existing investor rights on what you would actually receive in an exit. We work with your legal advisers on shareholders’ agreements to ensure the protections you are promised are the protections you hold. And we provide independent valuation and post-investment reporting, so you continue to see the business clearly after the money has gone in.

If you are considering an investment in a private company — or you are a founder preparing to raise and want your house in order before an investor looks through it — we would be glad to help.

SRC Chartered Accountants