WTF is due diligence?

What it is…

When considering buying a business, due diligence refers to the process of conducting a thorough investigation and analysis of the business before making a final decision.

TLDR: it’s when you look through the biz’s history to make sure you don’t sign on something with more red flags than a bullfight in Spain.

In most cases, you’ll perform due diligence after an offer has been accepted.

Table of Contents 👇

What to look for…

• Red flags 🚩
  • Are the books consistent across all docs?
  • Is there high employee turnover?
  • Does a large percentage of revenue comes from one customer?
  • Is there huge reliance on the owner to bring in business?
  • That type of thing.
• Potential upside 📈
  • Where does your expertise allow you to add more value? Marketing, sales, etc.
  • Can you improve operating margins by adding tech or refining existing processes?
  • Can you increase prices while not losing any revenue?

Building Your DD Dream Team

Due diligence often involves a team of professionals to do the deep-dive and validate if the findings are correct. Depending on your background, we strongly recommend having a trusted accountant & lawyer by your side who specializes in SMB acquisitions.

The 5-step process

These can be done in any order, but this is the usual order of operations in deal-making…

1. Determine if the sales listing looks good at a high level with our deal calculator.
2. Ask for the initial financial docs before deep-diving into the business.
   • Keep in mind, you do not want to overwhelm the seller by asking for 297 documents on your first meeting. That’s a surefire way to make a seller not want to do a deal with you. They are currently running a business, so they won’t have time to send you everything you need – especially before they know how serious you are about buying.
3. Send the seller (or broker) a Letter of Intent (LOI).
4. Once accepted, ask for full due diligence.
5. Start negotiation. 🤝

<aside> 💡 Wait, I have to send an offer before due diligence!?

</aside>

Most of the time, yes. 95% of due diligence will be conducted AFTER an LOI or APA is accepted. Don’t sweat it. An LOI is non-binding, so it’s okay if you send one and change the price (or back out of the deal) because of something that came up during due diligence. It happens.

Sellers don’t want to provide a lot of info before an offer is accepted. There are a bunch of tire kickers out there. And there are a bunch of competitors posing as interested buyers who would love to get their hands on that info. So you’ll be making an offer with the initial evaluation documents below. And get the rest of the documents later.

The Documents Checklist

Remember: less is more.

Do not ask the seller for 297 documents.

That’s a surefire way for them to ignore you.