Investment Readiness And Due Diligence: A Practical Guide For Startups And Investors In Nigeria

Introduction

Investing in Nigerian startups and companies offers significant opportunities, but it also comes with unique challenges that demand careful evaluation. For both investors and founders, understanding the due diligence process is critical to ensuring successful and risk-mitigated investments. Due diligence allows investors to verify a company's legal standing, financial health, regulatory compliance, and operational integrity, while also highlighting potential risks that could impact future growth.

For startups, preparing for investor scrutiny goes beyond crafting a compelling pitch, it requires demonstrating readiness across legal, financial, and operational dimensions. This guide provides a practical roadmap for investors looking to assess Nigerian companies and for founders seeking to prepare their startups for investment. It covers the essential aspects of due diligence, including legal verification, financial review, regulatory compliance, corporate structure, intellectual property, and material contracts, offering actionable insights to streamline the investment process and build investor confidence.

Conducting due diligence on a Nigerian Company before Investing

Before committing capital to a startup or established company, investors should conduct a comprehensive due diligence process to evaluate legal, financial, and regulatory risks. This process helps ensure that the business is legitimate, financially sound, and compliant with applicable laws and industry regulations.

1. Legal Due Diligence: A solid initial step is to verify the company's legal existence. Investors should carry out a search at the Corporate Affairs Commission (CAC) to obtain the company's incorporation details, shareholder information, list of directors, and any registered charges.

Investors should examine agreements with suppliers, customers, financial institutions, landlords, employees, distributors, and other partners. This assessment can reveal hidden liabilities that may not show up in financial statements, such as outstanding payment commitments, exclusivity provisions, or indemnities that could affect future revenue streams. It is equally important to assess the company's record of disputes and legal challenges. Searches at the courts and regulatory bodies may uncover ongoing litigation, enforcement efforts, arbitration cases, or investigations.¹

2. Financial Due Diligence: requires a close review of audited financial statement, cash-flow statements, existing debt obligations, the company's working capital, and its general financial stability. Given that asset ownership can sometimes be contentious in Nigeria, investors should take extra measures to confirm the title to land, machinery, and other significant assets. Irregular valuations, hidden debts, and questionable accounting practices are common warning signs.²

3. Regulatory Compliance Due Diligence: Nigeria has a highly active regulatory landscape, and many sectors require oversight or licensing from bodies such as the Central Bank of Nigeria (CBN), the Nigerian Communications Commission (NCC), NUPRC, NAFDAC, SON, and others. Confirming that all required licenses are current and that the company complies with applicable industry regulations can greatly minimize investment risk.

Another important area to scrutinize is tax compliance. Nigeria operates a complex, multi-tier tax structure, and companies must meet requirements at both federal and state levels. Examining tax returns, outstanding assessments, tax clearance certificates, and correspondence with revenue authorities can help determine whether the business has unpaid taxes or unresolved issues with the Federal Inland Revenue Service (FIRS) or state tax agencies.³

Preparing for Investors' Due Diligence

Raising investment requires more than a compelling pitch or a promising product, it demands that a startup demonstrates readiness across multiple operational, legal, and financial dimensions. Investors conduct a thorough due diligence process to evaluate the company's structure, governance, financial health, intellectual property, regulatory compliance, and contractual obligations. Each of these areas provides insight into the startup's stability, growth potential, and risk profile. The following sections outline the key components investors focus on and the steps founders should take to ensure their startup is well-prepared for scrutiny.

1. Corporate and Ownership Structure: Investors typically start by reviewing your company's structure, ownership, and governance framework. They want to see a straightforward structure supported by complete and accurate documentation. This includes your Certificate of Incorporation, Memorandum and Articles of Association, up-to-date statutory registers (covering directors, shareholders, and charges), minutes of meetings, and properly executed board and shareholder resolutions.⁴
2. Financial Records: Strong financial management is a key indicator of a startup's readiness for investment. Investors want clarity on the sources and uses of funds, as well as how additional capital will be handled. You should have your audited financial statements or management accounts (for younger startups), bank statements and tax filings. Ensure your accounting practices are consistent, and disclose any outstanding liabilities early.⁵
3. Intellectual Property (IP): For many startups, IP represents the most valuable asset. Investors need confirmation that the company not individual founders or contractors holds legal ownership of its intellectual property. Ensure that all software, trademarks, patents, domain names, designs, and branding assets are registered under the company's name. All founders, employees, and contractors should have signed IP assignment and confidentiality agreements. Keep trademark certificates, patent filings, NDAs, and software licenses organized.
4. Regulatory Compliance: For startups operating in regulated industries, strict compliance is essential. Ensure you have all necessary licenses, permits, and regulatory approvals, and maintain thorough records of filings, reports, and payments. For instance, fintech companies may need a CBN license or collaborations with licensed financial institutions, while most tech firms must adhere to the Nigeria Data Protection Act. Even small compliance gaps can slow or jeopardize funding rounds.
5. Material Contracts: Investors review the agreements that underpin your revenue and key partnerships. This encompasses customer contracts, supplier agreements, partnership or MoU documents, SLAs, licensing deals, and distribution or reseller arrangements. Particular attention is given to termination rights, exclusivity clauses, liability limits, and change-of-control provisions that might be triggered by an investment. If your startup depends heavily on a single customer or supplier, disclose this upfront and outline your strategy for mitigating the associated risks.⁶

Conclusion

Successfully attracting investment in Nigeria requires more than a promising product or business idea, it demands that startups demonstrate thorough readiness across legal, financial, operational, and regulatory dimensions. For investors, conducting diligent assessments of a company's legal standing, financial health, regulatory compliance, corporate governance, intellectual property, and material contracts is essential to identifying risks and making informed decisions.

For founders, understanding these expectations and preparing in advance can significantly streamline the due diligence process, enhance credibility, and increase the likelihood of securing funding. By maintaining transparent records, ensuring compliance, and addressing potential risks proactively, startups can not only build investor confidence but also lay a strong foundation for sustainable growth and long-term success in Nigeria's dynamic business environment.

Footnotes

1. https://www.forvismazars.com/ng/en/insights/publications/local-insights/legal-due-diligence

2. https://riskcontrolnigeria.com/blog/due-diligence-the-beacon-illuminating-nigerias-business-landscape

3. https://protech-consulting.org/legal-due-diligence-checklists-for-nigerian-investments-2/

4. https://blackcrest.africa/2024/08/22/a-blackcrest-guide-to-investor-due-diligence-for-startups-in-nigeria/

5. https://www.jpplaw.co.uk/news/preparing-for-investor-due-diligence/

6. https://halisiconsults.com/blogpost/investor-readiness/due-diligence-checklist-for-startups-approaching-investors/

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.