By: Richard Parker: Author of How To Buy A Good Business At A Great Price ©
Due diligence is probably the most critical stage in the buying process. Many prospective buyers incorrectly identify this period as strictly a financial review, but it goes far beyond that. Due diligence encompasses a far greater project – that being the complete investigation and review of the business.
One of the keys to buying a good business, comes from your ability to learn the intimate details of the business. To identify the strengths, weaknesses, pluses, minuses, growth opportunities and areas of concerns. If you do not do a flawless job of gathering information, you will not be able to pull the trigger and complete the transaction since you’ll be uncertain about too many components of the business.
When To Start The Due Diligence?
The investigation process begins the moment a business becomes of interest to you. Your goal is to make certain that you uncover everything about any business BEFORE you buy it. You don’t have to meet the seller or even visit the business for your research to begin. The Internet is an incredible tool that will allow you to investigate the business, the industry, the competition, the marketing, the suppliers, and on and on.
The importance of beginning your investigation early on cannot be emphasized strongly enough. This way, you’ll position yourself to ask the proper questions to the seller. Once you progress to the stage of an accepted offer, you will commence the inspection or financial due diligence. This period usually lasts 10-30 days. This is the time when you’ll have access to all of the company’s books and records.
Once you being looking at a particular business, you’ll find a thousand things crossing your mind regarding the acquisition. Keep a notepad handy at all times and log your thoughts. You’ll have many thoughts about things “I need to check out”. Write these all in one place. Don’t trust your memory; these little things are the ones that can come back to haunt you down the road. Begin to put together your checklist of what you need to investigate and how you’re going to do it, along with the materials you may need from the seller to accomplish it.
A couple of things to keep in mind:
- Allow yourself enough time:
Many sellers and some brokers will press for a very short inspection period; sometimes just days. Don’t get bullied into this – give yourself ample time to complete this part of the process. You should allow for, negotiate and not settle for less than a 20-business-day inspection/due diligence period.
- Prepare properly:
Since you’ll have some time restrictions (you’ll only have x number of days per the contract), provide the seller with a listing of all of the materials required for you and/or your CPA to complete this exercise. No matter what you’re told, do not begin the process until they have everything ready for you.
- Dealing With Surprises:
You’ll probably find some surprises; don’t panic, it’s normal. Work through them. Get clarification. Build your case. Don’t run to the seller or broker every time you find an inconsistency between what you’ve seen versus what you were told. No business is perfect. The rule to follow is do not treat any incidents as catastrophes or any catastrophes as incidents. If you find a major problem, get your facts in order and you can then decide the appropriate action to be taken with the seller (i.e. renegotiation, walking from the deal, etc.).
According to industry statistics, nine out of ten people who begin the search to buy a business never complete a transaction. While there are many reasons for this dismal figure, a lot has to do with the inability of people to “pull the trigger”. This gun-shy reaction is related specifically to uncertainty: if you have not gathered the right information or failed to investigate the business thoroughly, you will not be 100% certain of what to do. And so, you’ll drop the project. Conversely, if you do a flawless job of investigating the business, and everything else adds up right, then making the final decision is simply one more step in the process!