As a potential investor in a company, do you and your team know what questions to ask? When you ask the questions, do you probe beyond the surface to verify the elements of the answers? Are there areas which could potentially put your investment at risk that you don’t know how to assess? How familiar are you with the following financial, operational, and strategic areas that many technology, biotechnology, and human health industry companies are involved in:

  • Private loan agreements
  • Private securities placements
  • Federal/state grant funding
  • Federal/state contracting
  • Employment practices and agreements
  • Generally Accepted Accounting Principles
  • Sarbanes-Oxley
  • Procurement practices and agreements
  • Tax compliance
  • Escheat
  • Legal and tax entity status

There are many other areas of business operations and activities in which significant liability and risk can be created for the unsuspecting individual, private, or public investor. With a constantly changing regulatory environment and evolving court rulings, there are more and more areas to identify, question, evaluate, and assess.

For instance, when it comes to dealing with government grant funding, most investors are unfamiliar with the landscape of the requirements imposed upon fund recipients for performance, operational processes and controls, and financial reporting and monitoring. When companies fail to comply, the entire business can be at risk for repayment, penalties, interest, and loss of the leadership to civil and criminal charges.

Investors evaluating early stage and emerging companies disclosing funding from grants and contracts need to be aware of where to look and how to identify signs of compliance. A compliant company has sound financial controls; strong internal and management oversight processes; and visible policies, procedures, and systems which demonstrate the business is run according to accepted business practices.

What are helpful questions a potential investor may use to evaluate if compliance is an issue:

  • Does the business have written policies and procedures?
  • Are financial statements generated regularly and are they complete and detailed so it is clear what the business is and isn’t doing?
  • Are there job descriptions, compensation plans, and policies related to paid time off and other fringe benefits?
  • Does management monitor financial performance against a budget and/or forecast?
  • Are there cash management processes and reporting?
  • Can funds received be tracked to sources and uses?

Investors need to be aware that early stage and emerging businesses are fantastic opportunities. These are the companies of tomorrow developing drugs, biomedical devices, agricultural products, educational materials, and a host of other products which will change the way we live. They are to be encouraged and supported. They are also expected to do business well. They are expected to be commercially and financially viable. To achieve all of those objectives, these businesses need to understand fully the importance of solid business systems and the appropriate investment in managing the operational and financial aspects of commercialization. The businesses that bring together innovative technology and sound business will be those that not only survive but also thrive.

Copyright ©2005 Lea A. Strickland, F.O.C.U.S. Resource, Inc.

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