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Hub You - Buying a Business? Think Due Diligence
It seems like not a week goes by that I don't get a small business owner who wants my help with their brochure. They need help with the copy, with the design, with the layout -- all of it.They are usually ready to pay me good money, too. Only problem is I tell them there's no way I would ever waste my time with a brochure. I've never used them myself and I've never known anyone who used them and reported it made a big difference in their profits.So I always tell people to forget the brochure. Instead, use a sales letter. A sales letter is much more effective than a brochure.Why do I say this?Well, for one thing if you get two pieces of mail one day -- one a three cover folded brochure, the other a letter that looks like it’s hand-typed and personally signed and personally addressed in a number 10 white envelope with a stamp on it -- which one are you going to read first?Fact is a simple, even ugly, sales letter is more personalized t
Other Assets - ask for a complete list of all other assets that the business owns. Identify the assets, locations and market value.
2. Check the company's assets:
Accounts Payable - Ask for a list of all vendors the business owes money to. Verify the validity of the underlying transaction. Make sure the products they were suppose to deliver was in fact delivered and in good condition. Has installation been provided? What are the payment terms?
Bank and other loans - Ask for loan agreements. Check the payment schedule, go back and track past payment and verify that the listed outstanding balance is correct. Inquire about the loan's rate and terms and can it be refinanced for a lower rate loan? Learn if the loan is collateralized and by what assets?
Other liabilities - Ask for a complete list of all other liabilities. For each one, run the same inquiries as we have suggested for Accounts Payable and Loans.
Note - a very important goal of the due diligence is to find out if there are liabilities not listed or disclosed by the seller. You need to verify that there are no additional debt to sup
This week I spent a few hours with a highly successful CEO discussing his brand identity questions and concerns. “What do the most successful brand initiatives have in common?” he asked. I shared an observation with him based on many years of having similar conversations and being involved in successful (and not so successful) branding programs.There are a lot of reasons to embark on a major corporate branding program, but from the point of view of a CEO, most of them are simply not compelling. For many years I have watched marketers and design managers struggle to get large scale identity programs funded and supported by senior-most management. Even though there are clear breakdowns caused by the existing identity systems and designers believe they are presenting a clear, rational justification for investment…their attempts are rebuffed more often than accepted.While designers think that because the expression of a brand is out of date or not working as har
You have probably been busy learning the business, talking to the seller about the operation, conducting market research and planning how can you run it better than the previous owner.
It does not matter if you are buying a small cell phone store, a large high-tech company or investing in a friend's "next big thing". There is one thing you should seriously consider: a due diligence.
What is a due diligence and why is it so important?
One (very technical and boring) definition of a due diligence is: Due diligence can apply either narrowly to the process of verifying the data presented in a business plan or sales memorandum, or broadly as completing the investigation and analytical process that precedes a commitment to invest. The purpose is to determine the attractiveness, risks, and issues regarding a transaction with a potential investment. Due diligence should enable investment professionals to realize an effective decision process and optimize the deal terms.
In reality due diligence is a process in which potential buyer (or investor) investigate, analyze, inquire and try to learn as much as possible on the purchased business in order to verify the accuracy of the information provided by the seller.
Since the information provided by the seller is the basis for the buyer's decision to buy (or not) and the purchase price, it is crucial that any buyer will verify that information before making the final commitment to invest.
How do you "due diligence"?
There several aspects of the business you should check:
Legal exposure
Technology and patents the business own
Business performance and financial position
Legal
Usually you need to contact the business's lawyer and ask for a letter listing all the legal actions and claims the business is a party to. The goal here is to understand the legal risks that the business is facing: Is there any legal action against the business that could end in a judgment against it? What is the maximum exposure? How much will the lawyers charge to represent the business?
With the lawyer's letter and the relevant information, you can go to the next level and hire your own layer to review the data and get a second opinion on those legal matters.
You should also ask for copies off all agreements, contracts or other binding understandings the business has with third parties. Here is a partial list:
Employment contract
Shareholders agreement
Leases
Purchasing agreement
Clients agreement
Licensing and royalties
Loan agreements
Technology and patents
If you are buying the business partially because of its technology or patents, you should assess the following:
Is the technology or patent actually registered on the business name?
In which jurisdictions?
When does the registration expire?
Has it been developed by the business, or does a third party could claim ownership of the technology / patent?
Ask for copies of all registration applications.
Once you have collected all the information about the technology / patents you can:
Retain a specialist who can assess the value of the technology
Retain a patent lawyer to assure the validity of the patents
Business performance and financial position
Most business sale transactions are based on either the business income / profits in the past few years, or the business assets and liabilities on the purchase date.
Therefore, it is extremely important to conduct a financial due diligence on the business before finalizing the deal.
What to do in a financial due diligence?
1. Check the company's assets:
Cash - Ask for all bank statements, petty cash and all other locations in which cash is held. See if the total matches seller's numbers.
Accounts Receivable - ask for a list of all customers who owe money to the business. See how long they have not paid. Inquire if there is a dispute with any of the customer and how much of the entire amount that owed will be actually paid (based on seller's belief?) Focus on large amounts and long overdue accounts. If it is over 60 days it should be checked out. Call the customers to verify that their balance agree with the seller's balance.
Inventory - Ask for a complete list of inventory items. Count the actual inventory and see it it matches the business inventory list. Ask for usage information, how much of each item is being shipped every week / month. If the shipped quantity is very low, it could indicate that this is a slow moving inventory item and that its value is minimal.
Other Assets - ask for a complete list of all other assets that the business owns. Identify the assets, locations and market value.
2. Check the company's assets:
Accounts Payable - Ask for a list of all vendors the business owes money to. Verify the validity of the underlying transaction. Make sure the products they were suppose to deliver was in fact delivered and in good condition. Has installation been provided? What are the payment terms?
Bank and other loans - Ask for loan agreements. Check the payment schedule, go back and track past payment and verify that the listed outstanding balance is correct. Inquire about the loan's rate and terms and can it be refinanced for a lower rate loan? Learn if the loan is collateralized and by what assets?
Other liabilities - Ask for a complete list of all other liabilities. For each one, run the same inquiries as we have suggested for Accounts Payable and Loans.
Note - a very important goal of the due diligence is to find out if there are liabilities not listed or disclosed by the seller. You need to verify that there are no additional debt to supp
Most marketing strategies are about being in motion. Have a plan, be proactive, and take the necessary action steps. Although being proactive is a necessary aspect of marketing, an often overlooked and yet equally important part is your company’s internal perception.Many companies put a lot of effort into all the external aspects of what they do, yet completely overlook what is happening due to internal perception. Internal perception includes your thoughts and beliefs; the internal dialogues and thought processes you have regarding your business, your industry and your customers/clients. Often, we may not be aware of hidden thoughts. Our thoughts support or hinder our success.To find out how what you believe take this simple test. For the next 48 hours notice what comes up when you are talking about your company, your products and services and the value you bring to the table. Do your internal thoughts match your words? Do you feel good about your interact
Since the information provided by the seller is the basis for the buyer's decision to buy (or not) and the purchase price, it is crucial that any buyer will verify that information before making the final commitment to invest.
How do you "due diligence"?
There several aspects of the business you should check:
Legal exposure
Technology and patents the business own
Business performance and financial position
Legal
Usually you need to contact the business's lawyer and ask for a letter listing all the legal actions and claims the business is a party to. The goal here is to understand the legal risks that the business is facing: Is there any legal action against the business that could end in a judgment against it? What is the maximum exposure? How much will the lawyers charge to represent the business?
With the lawyer's letter and the relevant information, you can go to the next level and hire your own layer to review the data and get a second opinion on those legal matters.
You should also ask for copies off all agreements, contracts or other binding understandings the business has with third parties. Here is a partial list:
Employment contract
Shareholders agreement
Leases
Purchasing agreement
Clients agreement
Licensing and royalties
Loan agreements
Technology and patents
If you are buying the business partially because of its technology or patents, you should assess the following:
Is the technology or patent actually registered on the business name?
In which jurisdictions?
When does the registration expire?
Has it been developed by the business, or does a third party could claim ownership of the technology / patent?
Ask for copies of all registration applications.
Once you have collected all the information about the technology / patents you can:
Retain a specialist who can assess the value of the technology
Retain a patent lawyer to assure the validity of the patents
Business performance and financial position
Most business sale transactions are based on either the business income / profits in the past few years, or the business assets and liabilities on the purchase date.
Therefore, it is extremely important to conduct a financial due diligence on the business before finalizing the deal.
What to do in a financial due diligence?
1. Check the company's assets:
Cash - Ask for all bank statements, petty cash and all other locations in which cash is held. See if the total matches seller's numbers.
Accounts Receivable - ask for a list of all customers who owe money to the business. See how long they have not paid. Inquire if there is a dispute with any of the customer and how much of the entire amount that owed will be actually paid (based on seller's belief?) Focus on large amounts and long overdue accounts. If it is over 60 days it should be checked out. Call the customers to verify that their balance agree with the seller's balance.
Inventory - Ask for a complete list of inventory items. Count the actual inventory and see it it matches the business inventory list. Ask for usage information, how much of each item is being shipped every week / month. If the shipped quantity is very low, it could indicate that this is a slow moving inventory item and that its value is minimal.
Other Assets - ask for a complete list of all other assets that the business owns. Identify the assets, locations and market value.
2. Check the company's assets:
Accounts Payable - Ask for a list of all vendors the business owes money to. Verify the validity of the underlying transaction. Make sure the products they were suppose to deliver was in fact delivered and in good condition. Has installation been provided? What are the payment terms?
Bank and other loans - Ask for loan agreements. Check the payment schedule, go back and track past payment and verify that the listed outstanding balance is correct. Inquire about the loan's rate and terms and can it be refinanced for a lower rate loan? Learn if the loan is collateralized and by what assets?
Other liabilities - Ask for a complete list of all other liabilities. For each one, run the same inquiries as we have suggested for Accounts Payable and Loans.
Note - a very important goal of the due diligence is to find out if there are liabilities not listed or disclosed by the seller. You need to verify that there are no additional debt to sup
This is the third installment to the article "Proper Questions To Ask In An Interview". Although this installment can be read alone, it would be best to read the first and second previous articles first.When it comes to asking a person for references, an employer can ask for the names of persons willing to provide professional and/or character references for the prospective employee. An employer should ask, "By whom were you referred for a position here"? An employer should not ask a prospective employee questions of a prospective employee's former employers or acquaintances which elicit information specifying the prospective employee's religious creed, color, ancestry, race, national origin, medical condition, physical handicap, sex, age, or marital status.When it comes to asking a person who to notify when the potential employee has an accident or in an emergency, an employer should simply ask that. An employer should not ask a potential employee the n
You should also ask for copies off all agreements, contracts or other binding understandings the business has with third parties. Here is a partial list:
Employment contract
Shareholders agreement
Leases
Purchasing agreement
Clients agreement
Licensing and royalties
Loan agreements
Technology and patents
If you are buying the business partially because of its technology or patents, you should assess the following:
Is the technology or patent actually registered on the business name?
In which jurisdictions?
When does the registration expire?
Has it been developed by the business, or does a third party could claim ownership of the technology / patent?
Ask for copies of all registration applications.
Once you have collected all the information about the technology / patents you can:
Retain a specialist who can assess the value of the technology
Retain a patent lawyer to assure the validity of the patents
Business performance and financial position
Most business sale transactions are based on either the business income / profits in the past few years, or the business assets and liabilities on the purchase date.
Therefore, it is extremely important to conduct a financial due diligence on the business before finalizing the deal.
What to do in a financial due diligence?
1. Check the company's assets:
Cash - Ask for all bank statements, petty cash and all other locations in which cash is held. See if the total matches seller's numbers.
Accounts Receivable - ask for a list of all customers who owe money to the business. See how long they have not paid. Inquire if there is a dispute with any of the customer and how much of the entire amount that owed will be actually paid (based on seller's belief?) Focus on large amounts and long overdue accounts. If it is over 60 days it should be checked out. Call the customers to verify that their balance agree with the seller's balance.
Inventory - Ask for a complete list of inventory items. Count the actual inventory and see it it matches the business inventory list. Ask for usage information, how much of each item is being shipped every week / month. If the shipped quantity is very low, it could indicate that this is a slow moving inventory item and that its value is minimal.
Other Assets - ask for a complete list of all other assets that the business owns. Identify the assets, locations and market value.
2. Check the company's assets:
Accounts Payable - Ask for a list of all vendors the business owes money to. Verify the validity of the underlying transaction. Make sure the products they were suppose to deliver was in fact delivered and in good condition. Has installation been provided? What are the payment terms?
Bank and other loans - Ask for loan agreements. Check the payment schedule, go back and track past payment and verify that the listed outstanding balance is correct. Inquire about the loan's rate and terms and can it be refinanced for a lower rate loan? Learn if the loan is collateralized and by what assets?
Other liabilities - Ask for a complete list of all other liabilities. For each one, run the same inquiries as we have suggested for Accounts Payable and Loans.
Note - a very important goal of the due diligence is to find out if there are liabilities not listed or disclosed by the seller. You need to verify that there are no additional debt to sup
While I’m a strong advocate of hiring virtual assistants, there are two things that no entrepreneur should ever fully delegate: marketing and bookkeeping. The marketing and the bookkeeping of your business can easily make or break you (just think “new” Coke and Enron). That said, if bookkeeping is not your forte, hire someone to do it – you will save so much in frustration – just be sure to keep your fingers in the books.If you choose to hire a bookkeeper, keep the following in mind:1. Get QuickBooks.For ease of use, I highly recommend using QuickBooks and hiring a QuickBooks ProAdvisor. QuickBooks ProAdvisors have taken certification exams to insure that they know the system. I have used QuickBooks both for myself and my clients since 1996 and highly recommend it for its ease of use/understanding.The online version is great in that you can see the latest version of your books at any time and eliminate the annoyance of emailin
Therefore, it is extremely important to conduct a financial due diligence on the business before finalizing the deal.
What to do in a financial due diligence?
1. Check the company's assets:
Cash - Ask for all bank statements, petty cash and all other locations in which cash is held. See if the total matches seller's numbers.
Accounts Receivable - ask for a list of all customers who owe money to the business. See how long they have not paid. Inquire if there is a dispute with any of the customer and how much of the entire amount that owed will be actually paid (based on seller's belief?) Focus on large amounts and long overdue accounts. If it is over 60 days it should be checked out. Call the customers to verify that their balance agree with the seller's balance.
Inventory - Ask for a complete list of inventory items. Count the actual inventory and see it it matches the business inventory list. Ask for usage information, how much of each item is being shipped every week / month. If the shipped quantity is very low, it could indicate that this is a slow moving inventory item and that its value is minimal.
Other Assets - ask for a complete list of all other assets that the business owns. Identify the assets, locations and market value.
2. Check the company's assets:
Accounts Payable - Ask for a list of all vendors the business owes money to. Verify the validity of the underlying transaction. Make sure the products they were suppose to deliver was in fact delivered and in good condition. Has installation been provided? What are the payment terms?
Bank and other loans - Ask for loan agreements. Check the payment schedule, go back and track past payment and verify that the listed outstanding balance is correct. Inquire about the loan's rate and terms and can it be refinanced for a lower rate loan? Learn if the loan is collateralized and by what assets?
Other liabilities - Ask for a complete list of all other liabilities. For each one, run the same inquiries as we have suggested for Accounts Payable and Loans.
Note - a very important goal of the due diligence is to find out if there are liabilities not listed or disclosed by the seller. You need to verify that there are no additional debt to sup
Join the workforce. Once you've attained your masters degree you can definitely find a job. Having a master's degree will open many doors for you in the professional world. Research the careers in your field. If you have a master in business administration, you can look for businesses you would like to work with. If you have a master's in teaching, think about what school districts you would like to teach in.After you've done some research, it's time to check the job boards. Get a newspaper every day and see what new jobs are posted. You may find a few good ads you'd like to answer.One of the best ways to job search is looking online. There are many features you can utilize to make your job search easier and less time-consuming. One way is by using keyword searches. You can type the name of the position you are looking for and a list of matches will appear. You can sort these matches by date so that you see the freshest job ads first.Another advantage
Other Assets - ask for a complete list of all other assets that the business owns. Identify the assets, locations and market value.
2. Check the company's assets:
Accounts Payable - Ask for a list of all vendors the business owes money to. Verify the validity of the underlying transaction. Make sure the products they were suppose to deliver was in fact delivered and in good condition. Has installation been provided? What are the payment terms?
Bank and other loans - Ask for loan agreements. Check the payment schedule, go back and track past payment and verify that the listed outstanding balance is correct. Inquire about the loan's rate and terms and can it be refinanced for a lower rate loan? Learn if the loan is collateralized and by what assets?
Other liabilities - Ask for a complete list of all other liabilities. For each one, run the same inquiries as we have suggested for Accounts Payable and Loans.
Note - a very important goal of the due diligence is to find out if there are liabilities not listed or disclosed by the seller. You need to verify that there are no additional debt to suppliers, banks, other loan providers or any other undisclosed amounts.
3. Check the company's income and expenses:
Sales - ask for list of all sales transactions in the past 3 years. Go thru them. Ask for documentation of the largest ones: Customer Purchase Orders, Invoices, Shipping Slips and Receipts. Make sure that the transactions have been actually paid by the customer and if not that it will be paid according to the company's credit terms. Compare the total sales of the three years to see if the business is growing, shrinking or in a stagnation.
Expenses - Ask for a breakdown of each expenses. You should first focus on inventory purchase. See how much the products cost, for how much it being sold for and what is the profit on each item. Track the purchases of the inventory to the sale transaction to see the full cycle. After inventory purchases go thru all other expenses to verify the authenticity of each transaction. A partial list of expenses includes:
- Wages and Benefits
- Marketing and Sales
- Rent and Utilities
- Legal and Accounting
- Office Expenses and Supplies
- Taxes
- Travel
- Interest and Finance Charges
- Outside Service and Subcontractors
As with liabilities you should look for unrecorded expenses to understand the true and actual expenses rate of the business so you will have no future surprises.
Conclusion
Buying a business is a huge investment you make. To make sure that "what you see is what you get" you should conduct a due diligence.
This article describes ways and points you should focus on when conducting the due diligence.
And as always, there is no substitute to retaining a professional who understands due diligence and have the right experience. When buying a business you should really consult with an accountant and make sure you cover all bases.
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