Streamline sales due diligence for organizations

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Just some things to think about. I always get attorneys and accountants to do the due diligence. I think it's a mistake not to there's three types of due diligence. There's commercial. They're basically looking at everything from the market to how you do business financial due diligence. They're going to look at all the financial statements and money stuff. And then league is pretty self-defining. I think all things legal here are the things that you're going to want to do. You're going to want to review the Target's business plan for commercial CDD business plan and forecasts are the targets likely to be met. This is where it's important for you. When you think about selling to have a budget and actual, and be able to say I was pretty much on point research and assessment of the market. What's the Target's position in the market? Is it a dominant? We typically like to buy the dominant player or the top two or three, what are the market trends and outlook? Are there any risks in the market that might affect the Target's future value? What our market and product trends, analyzing competitors and customers, which competitors are strongest, which are weakest. How's the target perform in comparison to them? What is the ideal customer profile for this business revenue and gross margin models? If they do have a budget and they've got projections, which usually when a business is selling, they've done proforma going forward with that hockey stick, will they hit the projections? What's their history of meeting projections. Again, back to why you need to have a budget. What are the buyers, restatements and proforma financials? So the buyer typically is going to say, the company is actually so much more profitable than, than the financials show that it is. And some of those expenses should go back in to restate the financials. And some of them shouldn't because some of them actually are things that are expenses of the company, then pricing and margins. What are the price fluctuations? What are price trends and future projections? Are we going to be able to continue to charge what we're charging now? Is there a chance for us to raise prices? And then how strong is the brand? How is the culture, how does the culture fit with yours? How is the Target's customer experience? What's their net promoter score. What's their customer satisfaction scores. That has been a part of every sale that we have done over the last several years. They didn't used to do that, but now they'll go in and actually pull the people, your customers and say, what's the likelihood that you would recommend this business to a friend and they'll give you an NPS score. And if it's a low score, that means they know that you're not going to grow as fast if you've got a low NPS. So that's something that can be a ding for you on your multiple for financial due diligence, three to five years of financials with trend lines and ratio analysis. It's really great. If they are audited their three levels of financial statements, there's the ones where you bring a shoe box into the accountant and say, please turn this into something that looks like a financial statement. That's called compiled. There's reviewed where the accountants kind of go through and check some things out, but aren't really willing to sign on the dotted line to say that the financial statements are accurate. And then there's audited, which says it's an opinion from the accountants that these financial statements fairly represent the position of the company. And if we're wrong, you can come Sue us income statement, balance sheet, and statement of changes in financial position are the three ones that you generally look at. But in addition to that, there is a statement of cash flows. Look at the cashflow versus the income statement, restrictions on cash flow. If the company has any loans with banks or third party lenders, there may be restrictive covenants that say that cash has to stay at a certain level or the current assets to current liabilities has to stay at a certain number adjustment wise. Are there any inappropriate operational to non-operational shifts? One of the tricks that you might try if you were a less scrupulous seller is you might fire say your Salesforce, which is an operational expense and hire a consultant, which is generally considered a onetime expense. And then one time expenses are typically not included on the financial statements when they get restated. So you want to be sure that all of the people who are necessary to the continuing operation of the business are treated as necessary to the continuing operations of the business and those expenses stay on the financial statements. So CapEx versus OPEX analysis, analyzing the capital expenditures versus that the one time events that I meant public and third party and internal references. So accountants, opinions and comments on the financials, you should always read if there are audited, if there are any management letters to accountants, or if there are public filings, looking at the MTNA, the management discussion and analysis, those are all good sources of kind of inside information, revenue, MRR, and AR do you want to look at the churn? You also want to look at a waterfall analysis so that, you know, by cohort, what is the trend of MRR churn accounts, receivable, aging, as accounts receivable get older, they become more difficult to collect. So if you see, this is another trick when you're selling is that you ease the credit terms with what your customers can buy, so that gooses your sales, but then your collectability on your sales is going to be less likely to be realized. So you want to be careful about that. If you see a big jump in accounts receivable, then I would ask them what happened with your credit terms? Have you made any changes? And then I'd have them put a rep and warranty. And if you can't get that information, backlog and pipeline of work to work in process, is there work in process. Enough to meet the backlog. Or are they just listening to the machines worrying? Cause that makes them feel good and making too much stuff. And their backlog and pipeline is actually declining. So that's a balance that you're going to want to look at. Major customer purchase history is trends and projections. Are they likely to continue to purchase untapped channels and geo cleaning opportunities? How easy would this business be to just kind of stamp out in other places? What are the pricing models, histories, trends on pricing? How likely are you to be able to increase that if there's an estimating department or something like that then, or an actuarial department, how accurate are there estimates? How are expenses going or expenses going up or down? What is the expense percentage to sales by category and visa VI other industry benchmarks. You can get that benchmark information from associations, trade shows, trade groups, or is minor restating the owner's personal expenses restating the employee and owner loans is expensive. Fixed assets, CapEx, FFNE, aging. How old is the stuff that's making stuff go? How old are the machines? Do you need to replace them? If you need to replace them soon, then that's going to enter into the purchase price. How obsolete are the machines? How obsolete is the inventory that you've got as well, book value to fair market value comparison. So this is where you can sometimes find hidden treasure because accountants record things historically, they don't generally go in and revalue them, even though they appreciate. So any appreciating assets like real estate might be dramatically undervalued and carried on the balance sheet at nothing. They might be fully depreciated down to nothing. There's absolutely. I promise you in any appreciable asset that is on a balance sheet is worth more than it shows on the balance sheet. So it's a good place to look and see. Maybe there's something that you can go in. And this actually happens at big deals to inspection utilization and maintenance liabilities. Look at their accounts payable. Is there any related party debt related party? Debt is usually really easy to make, go away. You can just have them talk to uncle Joe and say, Hey, you know, how about, how about we take that off the balance sheet, or I pay you that separately. If you're negotiating, are there any assets that have been pledged? Are there unrecorded, liabilities or leases? And what kinds of taxes, income, payroll, sales tax, other taxes, controversies. Are there any you'd want to kind of look at past lawsuits and mediations and disputes? Is there anything that's threatened or pending? That's usually a rep and warranty that's in your document that says nothing like that's happening. And then just a list of all the entities and their status being sure they're up to date, corporate minutes, that kind of stuff. Look at any contracts that they've got, HR and employment, intellectual property, patents, trademarks, copyrights, that kind of stuff. It's all legal stuff. Thoughts on due diligence move fast. Don't let due diligence slow you down. Use an SPV so that you separate everything. If you're buying with an SPV and you're ready to go, sometimes you can close the deal faster by closing, before you do all of the extensive due diligence. So just do the things that absolutely need to be done. And then go ahead and close because you're buying the company with the company's assets anyway. And so as long as there's no liability that come back to bite you, you get that out of the way you can close and then do the rest of the due diligence after, but you've got your deal done clue to breakup clause in the event. Something bad happens. Be sure to complete your due diligence after the acquisition and use an attorney or good accountant to do that.