The shape of it
A term sheet is a promise to keep talking. It sets the price and the main terms, and it almost always says the investment depends on the results of diligence. Between that page and the money arriving, the investor checks whether what it was told is true, and whether anything it was not told changes its mind.
How long it takes depends on the investor and the size of the cheque. A seed investor may take two weeks. A private equity firm buying a company, or a private credit fund lending to one, will take two to four months and hire accountants, lawyers and industry advisers to do much of the work.
The order below is roughly the order in which the checks happen. The earlier ones decide whether the later ones are worth paying for.
Diligence is not a search for a reason to invest. It is a search for a reason not to.
1. The people
Before anything else, the investor checks the people it is backing. Who are they, what have they done before, and does it match what they said?
This means references, formal and informal. The formal ones are the names the founder provides. The informal ones are former colleagues, former investors and customers the investor finds for itself. A professional investor will always find someone the founder did not suggest.
It also means background checks: directorships, litigation, insolvencies, regulatory actions, press. In the UK, Companies House shows every directorship a person has held. Anything there that the founder did not mention will be asked about.
The question behind it: if this goes wrong, will these people tell us early and act sensibly?
2. Identity and source of funds
Every regulated investor must know who it is dealing with. Anti-money-laundering rules in the UK and the US require it to identify the company, its beneficial owners and its controllers, and to understand the source of any funds involved.2,3 This is mechanical, and it is the most common cause of avoidable delay. The investor will ask for passports, proof of address, the full shareholder register and an ownership chart that goes all the way up to individuals.
The question behind it: can we legally do this deal?
3. The numbers
The financial diligence asks whether the numbers in the pitch are the numbers in the accounts, and whether the accounts describe the business as it really is.
For a company of any size, this means a quality of earnings review. Accountants rebuild the earnings from the bottom up: revenue by customer and by month, and costs by type. They test the adjustments the company makes to reach its "adjusted" figures, and the working capital the business needs to run. They test each adjustment. Is that cost really one-off? Is that revenue really recurring?
Most problems surface here. A large customer who is about to leave. Revenue recognised early. Costs capitalised that should have been expensed. Adjustments that add back the same costs every year. A management accounts figure that does not reconcile to the audited accounts.
A company that has already reconciled its own numbers, and can explain every adjustment in one sentence, saves weeks. One that cannot will lose the investor's trust faster than any other way.
The question behind it: are the earnings we are paying for real, and will they recur?
4. The market and the customers
Commercial diligence asks whether the business will do what the plan says. It looks at the market's size and direction, the company's share of it, its competitors, and its pricing. Above all it talks to customers.
Customer calls are where investors learn the most. Why did you choose this company? What would make you leave? What do you pay, and would you pay more? Who else did you consider? A founder who has a strong product will want investors to make these calls. One who resists them is telling the investor something.
The question behind it: will the revenue in the plan arrive?
5. The legal record
Lawyers check that the company owns what it says it owns and owes what it says it owes. That means the constitution and share register, and every material contract. The large customer and supplier contracts matter most, especially whether they can be ended on a change of control. Then come employment contracts for key people, intellectual property and who owns it, property leases, disputes and regulatory licences.
It also means the existing capital. Every loan agreement, every charge, every option and warrant, every side letter with an earlier investor. A forgotten convertible note or an undisclosed preference can change the price of a round.
The question behind it: is there anything that could take value away from us after we invest?
6. Tax
Tax diligence checks that the company has paid what it owes and that nothing in its history creates a liability that will fall on the new investors. It also checks the structure of the investment itself, so that it does not create tax that could have been avoided.
The question behind it: is there a bill we cannot see?
7. The specialist checks
Depending on the business, there will be more. Technology companies face a review of their code and security. Regulated businesses face a review of their licences and compliance record. Companies with physical assets face environmental and technical surveys. Lenders to infrastructure projects hire an independent engineer. Lenders to anything with a model hire someone to audit it.
The question behind it: is there a risk in this industry we do not know how to see?
8. Confirmatory and closing
The last stage confirms that nothing has changed. The investor will ask for up-to-date management accounts, a bring-down of the earlier checks, and confirmation that the company has run normally since the term sheet. The legal documents are finalised: the subscription or loan agreement, the shareholders' agreement, the security documents.
Every condition in the documents must be met before money moves: board approvals, third-party consents, the release of old security, regulatory clearances, insurance in place. Each is small. Together they decide the date.
What makes it go faster
Diligence is slow when the investor has to dig for information and fast when it is already laid out. Companies that close fast have usually done four things before the term sheet.
They have checked themselves. The numbers reconcile, the adjustments are documented, the share register is clean, and every contract is in the data room.
They have told the investor the bad news first. Every company has something: a customer who left, a dispute, a quarter that missed. Disclosed early, it is a fact to weigh. Found in diligence, it is a question about everything else.
They have one person in charge. A single person who knows where everything is and answers within a day.
They know what the investor will ask. Investors are predictable. The questions above are asked in almost every deal, and the answers can be prepared before anyone asks.
In late 2023, about 45% of US Series A rounds on Carta were bridges: extensions of an earlier round raised because the next one had not closed.1 Not all of those were lost in diligence. But a raise that runs out of time is usually a raise that spent too long proving things it could have shown on the first day.
Method. This guide describes common practice in professional equity and debt investment in the UK and the US. Requirements vary by investor, jurisdiction and deal. It is general information and not legal, tax or investment advice.
“Diligence is not a search for a reason to invest. It is a search for a reason not to.”
Sources
- State of Private Markets: Q4 2023, Carta, 2024
- Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, legislation.gov.uk
- Customer Due Diligence Requirements for Financial Institutions (CDD Rule), Financial Crimes Enforcement Network
Cite as: “What investors check before they wire”, Norvian Review, 17 September 2026.
