A reader of this blog emailed me a question about Due Diligence. I replied with an answer which got me to thinking that performing due diligence is research more often employed by big corporate companies or mid-sized businesses. This is often the case with mergers and acquisitions like the recent purchase of YouTube by Google. However, thanks to the available of public information on the internet, an entrepreneur can conduct some due diligence on their without spending a lot of money on lawyers or consultants which may not be cost-effective if you have reserve your capital for the purchase of a business.
To get started, talk directly to the seller of the business. There may be an intermediary like an attorney, but it’s good to get an idea of the person/people behind the business. If you cannot meet with the owners, then go ahead and begin research on the industry on the prospective business. Think of yourself as an investigative journalist. Find out who is the customers/client base, their competitors, and their market share.
Determine the company’s leverage to see if their debt is too much. More debt is more risky so you want to make sure that feel comfortable with their purchase. You could end up with buyer’s remorse, but you cannot return it to a store as easily as an ugly sweater after the holidays.First, google the company. Look for business news. Find out what is their reputation in both the community and industry. Then make a trip to your local public library. Do a Lexis Nexis search. Obtain Dunn and Bradstreet and any credit reports on the company, if available. Inquire if the prospective company factors their receivables. Factoring is when a company a gets capital based on the value of their current accounts receivables. [ It is sorta like how check-cashing stores will a person an advance on the paycheck for a high fee.] If the company is a retailer, find out about their inventory. You want to know how quickly they turn their inventory into actual sales. Then talk to seller again armed with all the information to make a good decision. Don’t forget to trust your gut!