Due Diligence Investigation: Just Call Me Sherlock

When buying a business one has to see what is not on the financial documents that are provided by the seller. To do that you need to graduate the Sherlock Holmes College of Observation. Mr. Holmes was famous for seeing small clues that appeared to others to be meaningless.  But in truth they were the keys to solving the case. 

In my 20 years of doing business due diligence I have concluded it is not about the information that I am given, but the information that is withheld or was not provided that solves my cases.

For example:

I am doing financial due diligence on a shoe store. I started looking at the profit margin on the shoes. The profit and loss statement says that the cost of goods sold is half the gross sales income. The business does over half its volume from online sales. The prices are listed on the website. When we looked online we found that they are selling shoes at a 25% discount off of the list price. The invoices show that the store cost is half the list price.

How can you double your cost when you sell shoes on your website at a discount?

The purchase orders show the shoes are marked up only 50%. That means the gross profit is only 25% of the sales price. I then sent Mr. Watson (the prospective buyer) into the store to investigate this little inconsistency.

I look forward to finding out the answer to this mystery. In the meantime, I have to find a British store that sells pipes and wool hats with mufflers on them.

Share your stories, comments and questions below.

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