Wambua hopped on a flight from Nairobi to Lusaka. He journeyed to investigate a leading Zambian financial services firm.

Wambua represented investors in Nairobi and London who intended to make equity investments across Africa into well-established medium enterprises.

The April 11, 2014 edition of Business Talk broached the subject of early stage investing. However, once your firm reaches the medium-size level, investors take a different and more fact-based approach to your business.

The investigations move away from your personality, trustworthiness, and potential, and shift towards your track record and whether you built your business with quality.

The investors in Nairobi and London already analysed the Zambian firm’s financial statement. Pleased with the growth, margins, and track-record, the investors sent Wambua to investigate whether the company possessed any structural, process, or potential for fraud issues.

So, Wambua lands at Kenneth Kaunda International Airport. A company car picks him up and whisks him to the office in the heart of Lusaka city centre.

Sitting in the boardroom, he must direct the company’s management team as to what information he must investigate to determine whether the firm represents an entity with acceptable investment risk.

As Wambua, how would you proceed? What do you look for at first? Many of us might suppose that you start looking at the financial statements. However, the financial statements in such transactions get sent months earlier and the investors in Nairobi and London already scoured them with analysis.


So, Wambua should begin at the top and look at governance. Kenyans, for example, place heavy importance on the role of governance in a firm.

However, across the continent, many other nations lack such emphasis. Even in Kenya though, lines often get blurred between governance and management.

Ideally Wambua needs to look for a board that provides advice and oversight, but does not carry out the decisions it makes. Carrying out decisions should fall to the management itself.

Wambua should look into all the board of directors’ minutes for the prior three years. Does the board meet at least quarterly? Do all board members participate in meetings or just a few? Does the board hold specialised committee meetings: finance, audit, human resources, etc.? Does the board contain family members of management?

Wambua should also meet with at least two board members individually and pose questions. Does the board provide a performance review to the CEO? How does the board hold the CEO accountable?

Wambua should also look for boards that retain staggered terms — some members added and removed at different intervals so not all join and leave at the same time. Do the terms a board member can serve have limits?

Investors also desire diversified boards. A heterogeneous board creates tension, but also provides comprehensive coverage for complex solutions to issues.

Diversity should originate with different ethnic backgrounds, ages, and professional qualifications. A finance person, a lawyer, a business owner, an importer, an academic, industry expert, and a consultant, among others, all make excellent diverse additions to the board.

Finally, investors desire boards small enough to function quickly, but large enough to provide depth of knowledge and contacts. How big specifically depends on the industry, but usually ranges between seven and 11 members.


Next, Wambua would then proceed to investigate management. Many small businesses in Sub-Saharan Africa start with an entrepreneur bringing in family members that he or she trusts to assist in running the business.

Eventually, though, by the medium-sized enterprise level, the entrepreneur diversifies management to rely on professionals. So, investors do not want family members in management positions by the medium stage of business growth.

If family members exist, the investors would condition the equity offer on removing those with family relationships inside the firm.

So, Wambua would look at the qualifications of each manager. Does the chief accountant hold a CPA? Various African nations do not possess official CPA qualifications like in Kenya.

So, does the chief accountant have education and experience in accounting? Does human resources have a background in the field and organisational behaviour, etc?

Then Wambua needs assurances through evidence that the managers actually meet as a team on a regular basis. He would look through records such as minutes and then confirm through questions to each manager.


Wambua next would investigate the finance office. Again, the investors already conducted the financial analysis.

Wambua needs to leave Zambia assured that the company’s financial statements provided to investors were the real statements. The investor representative, in our example Wambua, would conduct an abbreviated mini one-day audit.

Wambua would look into the system directly. Do the system figures match the backup figures? Do the system figures match the paper records?

Wambua, like all good auditors who conduct large-scale audits, would take a sample of accounts receivable, accounts payable, and any inventory figures (depending on the industry) and verify with the third-parties or take a physical count.

Again, Wambua would conduct such actions on a tiny scale: one or two samples for each.

Finally, Wambua should delve into the financial processes. Does the firm conduct bank reconciliations soon after the close of each month? Does the firm keep records locked up? How soon are month-end reports provided to management? Does management meet with finance to discuss the numbers?

Understanding how investors conduct due diligence helps you build your firm according to best practices and assists you to prepare for their visit.