Preface: Small business due diligence requires time and thought. Be thorough. The following blog is to help you think about pertinent questions with advice to obtain proper paperwork texture.
Due Diligence Assessment – Part I
Due diligence is best performed as team. What probes do you need when performing due diligence? The following list are questions to help get you on the right path.
Begin with who is the businesses customer(s). What is the average size of a customer’s account? A business with an average sale of $120,000 will require a different methodology and hold greater homogenization risk than a business with average customer sales of $200. What are the revenue trends of customers? Are customers purchasing on a recurring basis, and if so, with what frequency? Are there any significant customer concentrations? Does one customer represent more than 10% of annual revenue? What characteristics keep customers? Will the customers take their business elsewhere with new management? What are customer turnover rates? Do customers frequent the business only when in the area, or when sales and discounts are in season? What creates customer turnover for the business? Do customers turnover because of lack of service, price, convenience or other factors? What is the company’s strategy for obtaining new customers? How does the company get new customers to purchase its products or service and develop revenue? How key is a sale team to the business? Who is that sales team? How many competitors does the business face? Is the business in a fiercely competitive industry, e.g. fast food restaurants in a metropolitan area? What is the defining competitive edge? Will the competitive edge work for your product or service. What are the values of the business? Do you value those values?
If the business is service oriented, can it retain intellectual capital, i.e. key talent? What is the plan if key talent doesn’t like your work environment? What levels of working capital are required, i.e. inventory, accounts receivable? Will additional infusions of cash be required to rejuvenate operations? How will that additional working capital be obtained? What is the estimate of the additional working capital required? What does a SWOT analysis show about the business, e.g. strengths, weaknesses, opportunities, threats? Does the business have a great brand, location, or workforce? Is the business in a legacy industry? Is the business underutilizing capacity? What is the barrier to entry for competitors? Is the business seasonal, or susceptible to political, weather changes, or other uncontrollable events? Is the location of the business ideal for customers?
What is the industry forecast? What do industry experts predict as the future business environment of the industry? What differentiates the businesses products or services from the competition? Are the products innovative or legacy to the industry? What has defined the company’s revenue development in prior years, e.g. organic expansion or acquisitions of competitors? What research and development work is in place? Is research and development adequately funded? What new products are in the pipeline? What competitor threats face the industry? Where does the company stand amid competition, i.e. reputation, service, price. What is the company’s strategy? Who formulated that strategy? What are the company’s key competitive advantages amid existing and emerging competitors? What barriers of entry does the company face in new entering new markets? Is the business regulated by government? What are the drawbacks in the business?