The other day I had a client look at buying someone’s business. The seller was very anxious to close the deal quickly which was the first indication that there might be a problem. Looking at the finances for the prior three years, revenue and profits were definitely moving in the right direction and the buyer was eager to ink the deal, fearing that someone else would beat them to the punch. I urged the client to complete his due diligence before committing to the deal.
Fortunately, the client took my advise. In the subsequent due diligence, he later discovered that the seller had a very low reorder rate, signaling that the seller’s product was not that well received. Further, we discovered that the seller was experiencing high employee turn over, perhaps indicating they didn’t pay enough for the work they expected from their employees.
Finally, we noticed that their customer acquisition costs were rising and their gross margins were shrinking. While I often tell clients looking at buying someone else’s business that the deal has to make sense financially, you also have to make sure you complete your due diligence and analyze all aspects of the business.
Do you do your due diligence before you make a purchase?
