A business due diligence report is designed to prevent one all-too-common lament after a business acquisition: “If only we had known.”
Businesses often buy others for what seems like a good price only to discover unexpected problems that, if not insurmountable, are at least difficult to overcome. Don’t think that because the business being purchased is small — valued at $250,000 or even $150,000 — that it is immune to complications. A due diligence report will explore factors that are important considerations not only in acquisitions of small businesses, but also in mergers, virtual partnerships or even just close business relationships.
Maybe the acquired company has outstanding civil court claims against it. Perhaps it has disgruntled employees who make the company successful but are not interested in remaining with the company. It might be selling a product that it says is proprietary but for which it has no patent, or even a registered trade mark, leaving it open to imitation and depleted revenues. Its past year might have been a record year for profits but so unusual that it wasn’t a turning point so much as an anomaly.
How do you know about these signs of trouble? Order a business due diligence report and find out as much as you can before you commit.
Here are suggestions on how to make the most of due diligence reports:
Tip No. 1: Don’t let a small size scare you away from acquiring a business.
Don’t assume that because a business is small or has few, if any, employees that it lacks sophistication. Facts in the due diligence report can unveil business partners and the professionals that monitor its performance, reflecting on its professionalism, and factors that demonstrate its ability to leverage debt for improved performance.
A business valued at less than $250,000 isn’t unusual. Very often, these smallest of small businesses are run by the owner as the only employee. Some may outsource their labor needs to an independent vendor or directly acquire non-employee freelance workers. According to the Small Business Administration’s U.S. Small Business Profile for 2020, nonemployer firms make up 81 percent of the companies the SBA classifies as small businesses.
Perhaps as often, the businesses are devoid of assets other than the business owner’s acumen and information accumulated and stored, such as customer databases, product preferences and trends, and other market-related analytic data.
Examples of businesses typically this size and smaller are software companies, IT suppliers, utilities, professional services, wholesalers, home improvement contractors, home builders, freelance writers, delivery services and local entertainment businesses.
Tip No. 2: Beware of Fake Digital Data
Not everything is what it seems and not every due diligence report can spot all of the issues. Some of the cheats below are likely to be more common among small business than large ones.
Here are a few examples:
Fake Customer Reviews - These can be faked easily and this creates multiple issues, not the least of which being legal problems. If you acquire a business with fake reviews, you also acquire this problem.
Social media metrics - Followers, likes, shares… all of this interaction can be faked, purchased, or be deceptive in origin.
Website Traffic & Analytics - The devil is in the details here. Overall website traffic is not the most important factor here and you need to dive deeper. Where does the traffic come from? Does the traffic convert into leads or sales?
Tip No. 3: Know what a business due diligence report does.
A Global Backgrounds business due diligence report delivers facts about the company that is the subject of the report. These are verifiable, recorded truths about the company you are targeting. The experts at Global Backgrounds dive into records and databases to reveal those facts.
Among the records studied for the report are:
The company’s credit report.
Media reports, which can include both favorable and adverse information that, if nothing else, may color public opinion of the business (compliments or complaints by customers, dissatisfaction expressed by employees, protests aimed at the company, investigations opened against the business, and more).
Regulatory filings of the subject company, which would reveal earnings and liabilities, and may reveal questionable expenditures.
Public records, including civil court records, which would include judgments and other civil or regulatory actions against it.
Read the due diligence report with an open mind. When dealing with a small company, it’s not hard to reach the principal and get answers about any questionable findings, then decide on whether the information is negative, neutral or positive.
Tip No. 4: Know what a corporate due diligence report does not do.
A Global Backgrounds due diligence report does not recommend whether to buy a company, enter into a virtual partnership with it, or even conduct business with it. All those decisions remain with the client. The due diligence report does provide information from a variety of sources that can prove highly valuable while arriving at those decisions.
If a client is seeking opinions on the facts in the due diligence report, the client may — and should — turn that information over to its analysts, including accountants and legal counsel, for interpretations of what the findings mean. Those opinions, like the due diligence report itself, don’t say “proceed” or “stop everything,” but they very well might help to shape a deal by forming the basis for negotiations.
Tip No. 5: Recognize when a personal due diligence report should be ordered along with the corporate report.
Sometimes a small business is identified with its owner, especially if it is closely held. Other times, the owner may keep himself insulated from the reputation of the business, even though he makes all the important decisions.
Such businesses frequently are unincorporated, operating as a sole proprietorship; limited liability corporations; or S corporations, passing their earnings on to the owner as taxable income. In these cases, a personal due diligence report may be as necessary as a corporate background check. A personal due diligence check is also advisable if a condition of the sale is retention of the seller as an employee after the deal closes.
Personal due diligence reports include checks for criminal and civil court activity, a credit report, bankruptcies, judgments, liens, education and employment verification, and other pertinent background information.
Consult a Global Backgrounds Professional
If you need more guidance on obtaining a personal or business due diligence report, contact Global Backgrounds.