Services
Due Diligence 101 -
or What You Don't Know Can Kill You!
This article is written as a general discussion on the
subject of "Due Diligence". It is for informational purposes
and not intended to be a definitive guideline for your exact
situation. You should consult the appropriate professionals
with regards to your specific transaction or situation.
Further, this article is in no way advocating, suggesting or
implying that anyone engages in any type fraudulent
activities whatsoever. These are simply the things a buyer
should be aware of when doing due diligence in buyer a
business.
Introduction:
You spent months finding the right business. The Seller says that you cannot go by what the tax return shows but the business is making a lot of money, and he can prove it. Your inspection of the profit and loss statement shows that sales have been increasing slightly in the last few years. Most important, and the best news of all is; the price is right! Does it sound too good to be true? I am sorry to tell you this, it probably is.
I think it was Benjamin Franklin who said, "A fool and his money are soon parted." Mr. Franklin must have known a lot of business buyers. When buying appliances that break in a month, it costs you a few dollars. When you go to a swap meet and are cheated because the solid gold watch is really gold plated, it costs you a few hundred bucks. When a used car salesman cheats you, by selling you a lemon, where the speedometer has been turned back 100,000 miles, it costs you a few thousand dollars. Getting cheated buying a business can cost you many thousands to hundreds of thousands of dollars. The only investment or purchase that I know of where you can be cheated out of more money is in the area of real estate. Real Estate fraud can runs into the hundreds of millions of dollars and does. You would be shocked at all the people between 1875 and 1950 who saw ads for prime real estate in Florida and bought swamp land. What about prime Louisiana beach front with Alligators living outside your front door? I have written a series of articles on fraud and it keeps getting bigger and bigger.
I hope that the point is made. Never buy a business on someone's word. Actually, you should never buy anything on someone's word. Confirm everything, believe nothing and understand that you are still going to find out things, after the close of escrow, which is going to surprise you. A similar example is one known by every employer. A staff worked for a company for four months and complained to the personal officer that the job was just too difficult. He kept complaining that he needed more training and lower quotas. You feel sorry for him. You talk to him and talk to him about it. You listen and believe all the excuses he gives you for poor production. Finally he quit, blaming you for something that you did, this just before you were going to give up and fire him. Then you started to take over the work of finishing his incomplete projects. You are shocked, as you always are, at what he did wrong and what he had covered up, that he was not doing. This is what happens when you buy a business. You find out all the actions that the seller, not his staff, had stopped doing, from the day that he decided to sell the company.
Many businesses are doing well. Sometimes the owners have personal things going on in their home life. Sometimes they have medical problems. Many times the business is not doing well and the seller is frustrated. It is very common for a seller to work hard to build his business, but because of many reasons, it doesn't produce what the seller wants. He gets frustrated and one day he gives up. That is usually the day he calls that business broker he met and asks the big question. How long will it take you to get me out of this place? In his mind, he is gone. He just counts the days until he physically walks out.
Have I scared you? Good. There is a plus side. It is worth all the grief that you go through to buy a business when you get in to the driver's seat, put all the marketing actions into place and start driving your own business.
In 2000 I had a client buy a car wash soap manufacturing business for $2 Million dollars. The seller swore it was making $500,000 profit per year. Due Diligence showed it was only making $300,000. When presented with the auditor's report, the seller claimed the audit was wrong. The buyer bought the company, knowing he was overpaying for the business. Why? He had done his research on the production department and sales department. He went out on the deliveries with the drivers, and met customers. He determined that he could double the sales and profit within one year. After he bought the business he found two things to be true. The profit was $300,000, as my audit found. He could double the sales and profit within twelve months, and did. The seller tried to screw the buyer, but in the end, justice was served. The seller screwed himself more than he screwed the buyer by not running his business correctly. If he had he could of sold it for a lot more than $2 Million dollars.
Ok, enough with the fun stories for now. Let us get down to the details of what to look for when doing Due Diligence.
Due Diligence Defined:
The phrase is composed of two words. Due: which the dictionary defines as "Proper or Adequate" and Diligence: which is defined as "Degree of care or caution expected of a person, especially as a party to an agreement." Caution: is the watchword in this definition.
Conclusion
It is a hard life when you own your own business; you work long hours. Many people feel that is better than the alternative, which is to work for someone else, pay high taxes, never know if you will be laid off and after years of hard work, never have anything to show for it all.
If you are going to buy a business with your hard earned money, you want to make sure you get what you paid for. Many people believe it is all right to cheat the taxman but otherwise are very honest citizens. Others feel it is all right to cheat any poor sucker that comes along. Don't be a sucker, do your due diligence and get what you are paying for.
Then build your new business into something you can be proud of and enjoy. While building your new business, I suggest you make it a point to study everything you can about tax planning, tax avoidance and reducing taxes legally. I started in College learning about the tax codes only to find that there are so many ways to save taxes legally, you would never believe it. You will sleep better at night, I promise you if you run your company "by the book." Then ten to twenty years from now when you want to sell your business, you can ask top dollar and get it. This is because a buyer can do a simple business evaluation and clearly see that your business is doing exactly what your books say you are doing.
HAVING DUE DILIGENCE DONE and buying your own business can be a pleasant and rewarding experience!
Willard Michlin , CPA is a Business Evaluation Expert, a California Business Broker, a California Real Estate Broker and a Well-known Public speaker in the business community. He can be contacted at his Ventura, California office by calling 800-864-0420 or by e-mail at kismetrei@earthlink.net See other articles and information about his services at:
www.kismetbusinessbrokers.com
www.businessownerservices.com
www.thelatestmagazine.com
Click Here! or Email: business@businessbuyingservices.com to order THIS SERVICE or to ask questions.
Introduction:
You spent months finding the right business. The Seller says that you cannot go by what the tax return shows but the business is making a lot of money, and he can prove it. Your inspection of the profit and loss statement shows that sales have been increasing slightly in the last few years. Most important, and the best news of all is; the price is right! Does it sound too good to be true? I am sorry to tell you this, it probably is.
I think it was Benjamin Franklin who said, "A fool and his money are soon parted." Mr. Franklin must have known a lot of business buyers. When buying appliances that break in a month, it costs you a few dollars. When you go to a swap meet and are cheated because the solid gold watch is really gold plated, it costs you a few hundred bucks. When a used car salesman cheats you, by selling you a lemon, where the speedometer has been turned back 100,000 miles, it costs you a few thousand dollars. Getting cheated buying a business can cost you many thousands to hundreds of thousands of dollars. The only investment or purchase that I know of where you can be cheated out of more money is in the area of real estate. Real Estate fraud can runs into the hundreds of millions of dollars and does. You would be shocked at all the people between 1875 and 1950 who saw ads for prime real estate in Florida and bought swamp land. What about prime Louisiana beach front with Alligators living outside your front door? I have written a series of articles on fraud and it keeps getting bigger and bigger.
I hope that the point is made. Never buy a business on someone's word. Actually, you should never buy anything on someone's word. Confirm everything, believe nothing and understand that you are still going to find out things, after the close of escrow, which is going to surprise you. A similar example is one known by every employer. A staff worked for a company for four months and complained to the personal officer that the job was just too difficult. He kept complaining that he needed more training and lower quotas. You feel sorry for him. You talk to him and talk to him about it. You listen and believe all the excuses he gives you for poor production. Finally he quit, blaming you for something that you did, this just before you were going to give up and fire him. Then you started to take over the work of finishing his incomplete projects. You are shocked, as you always are, at what he did wrong and what he had covered up, that he was not doing. This is what happens when you buy a business. You find out all the actions that the seller, not his staff, had stopped doing, from the day that he decided to sell the company.
Many businesses are doing well. Sometimes the owners have personal things going on in their home life. Sometimes they have medical problems. Many times the business is not doing well and the seller is frustrated. It is very common for a seller to work hard to build his business, but because of many reasons, it doesn't produce what the seller wants. He gets frustrated and one day he gives up. That is usually the day he calls that business broker he met and asks the big question. How long will it take you to get me out of this place? In his mind, he is gone. He just counts the days until he physically walks out.
Have I scared you? Good. There is a plus side. It is worth all the grief that you go through to buy a business when you get in to the driver's seat, put all the marketing actions into place and start driving your own business.
In 2000 I had a client buy a car wash soap manufacturing business for $2 Million dollars. The seller swore it was making $500,000 profit per year. Due Diligence showed it was only making $300,000. When presented with the auditor's report, the seller claimed the audit was wrong. The buyer bought the company, knowing he was overpaying for the business. Why? He had done his research on the production department and sales department. He went out on the deliveries with the drivers, and met customers. He determined that he could double the sales and profit within one year. After he bought the business he found two things to be true. The profit was $300,000, as my audit found. He could double the sales and profit within twelve months, and did. The seller tried to screw the buyer, but in the end, justice was served. The seller screwed himself more than he screwed the buyer by not running his business correctly. If he had he could of sold it for a lot more than $2 Million dollars.
Ok, enough with the fun stories for now. Let us get down to the details of what to look for when doing Due Diligence.
Due Diligence Defined:
The phrase is composed of two words. Due: which the dictionary defines as "Proper or Adequate" and Diligence: which is defined as "Degree of care or caution expected of a person, especially as a party to an agreement." Caution: is the watchword in this definition.
Conclusion
It is a hard life when you own your own business; you work long hours. Many people feel that is better than the alternative, which is to work for someone else, pay high taxes, never know if you will be laid off and after years of hard work, never have anything to show for it all.
If you are going to buy a business with your hard earned money, you want to make sure you get what you paid for. Many people believe it is all right to cheat the taxman but otherwise are very honest citizens. Others feel it is all right to cheat any poor sucker that comes along. Don't be a sucker, do your due diligence and get what you are paying for.
Then build your new business into something you can be proud of and enjoy. While building your new business, I suggest you make it a point to study everything you can about tax planning, tax avoidance and reducing taxes legally. I started in College learning about the tax codes only to find that there are so many ways to save taxes legally, you would never believe it. You will sleep better at night, I promise you if you run your company "by the book." Then ten to twenty years from now when you want to sell your business, you can ask top dollar and get it. This is because a buyer can do a simple business evaluation and clearly see that your business is doing exactly what your books say you are doing.
HAVING DUE DILIGENCE DONE and buying your own business can be a pleasant and rewarding experience!
Willard Michlin , CPA is a Business Evaluation Expert, a California Business Broker, a California Real Estate Broker and a Well-known Public speaker in the business community. He can be contacted at his Ventura, California office by calling 800-864-0420 or by e-mail at kismetrei@earthlink.net See other articles and information about his services at:
www.kismetbusinessbrokers.com
www.businessownerservices.com
www.thelatestmagazine.com
Click Here! or Email: business@businessbuyingservices.com to order THIS SERVICE or to ask questions.
