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Due Diligence – How To Uncover any Problems BEFORE You Buy
By Richard Parker, President of The Business
For Sale Buyer Resource Center™ and author of
the most widely used reference resource and
strategy guide for buying a business for sale –
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 and 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 concern. 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 must begin the
moment a business becomes of interest.
Naturally, 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 begin 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 time than you comfortably need
to complete a thorough inspection/due-diligence
period. The financial review can usually be done
in days but there is more to investigate and
that is why a 20 business day period is not
unreasonable for larger businesses, while a 15
day period is needed for smaller ones in order
to complete the review and move the deal forward
to closing.
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 provided what you/your CPA need to
properly complete the review.
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!
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