“Due Diligence” information – What do I need to know. Part 1

This will be the first of a series of blogs on the information that should be considered with for a thorough due diligence when doing a comprehensive business deal. Conspicuously, it will be based on the format that information can be offered in on the BusinessPortal range of websites with the intention of showing the value and intention of the format. Please note that it is unlikely to be in the sequence that brokers or business owners will choose to release the information to prospective buyers or investors but that all of the information will eventually be useful and necessary for a thorough due diligence.

Let’s start with the standard business information that can generally be seen (in the business advertisement) before any discussions take place, specifically the information on Asking Price, Annual Turnover and Monthly Free Cash Flow (since the rest is pretty self-explanatory and really just narrows down the prospective investors choice based on their location, financial strength, skills and business preferences).

The Asking Price is an indication of the business owners’ idea of the value of the share of the business they are trying to sell. Generally this is an opening offer in a negotiation (though it can be non-negotiable) and it should be based on the perceived value of a business. Valuing a business is a tricky process because there is no correct (or wrong) way of doing it and certainly no standard way to value every business. As long as there’s a reasonable basis for the valuation, almost any factor can be justified to contribute to (or detract from) the value of business. The reason stock market prices are volatile is because no one can settle on a value of the businesses listed. At the end of the day, a business share is worth what someone is willing to pay for it but this will be affected by factors including but not limited to the value of the assets and liabilities the business has, its past performance, its perceived future performance, the people involved in running it, the market it acts in and its susceptibility to macro- and micro- economic forces, its competition and placement in the market, its operational-, sales-, marketing-, HR-, admin- and management processes etc. For bigger companies, it may be worthwhile to calculate value for a lot of these factors but smaller companies often rely on an educated guess and call it “goodwill”. Either way, these factors generally boil down to the risk involved in investing in a business.

One of the strongest indicators of a company’s relative strength in a market is its Annual Turnover. This is the total amount of money a company brings in due to its trading- (and perhaps investment-) activities before any of its costs are deducted. It is by far the easiest way to compare companies’ relative sizes if they are in the same industry. A company with a higher turnover is very likely to have a larger share of the market (of course, issues like the prices of products and/or services come into the calculation). It does, however, not tell you anything about the efficiency and profitability of a business. For that one needs to have a closer look at the Free Cash Flow.

If the cash flow is perpetually positive, the company’s profitable; if its zero it’s just breaking even and if it’s negative it’s making a loss. When a companies making a temporary loss this is not necessarily the worst condition for a buyer. It will mean that the company needs a turnaround but it might also mean that it can be acquired for reasonable value (since a loss-making business would indicate higher risk). Turning businesses around depends on their current efficiency, the skills the new investor might bring to the table as well as the market the business functions in (and perhaps also a little luck).

In the next blog I’ll consider some of the more detailed standard business information that can be made available on the Business Information tab of Business Views on the BusinessPortal range of websites. To get to see some of this information, there already has to be a reasonable rapport between the business owner and prospective investor.

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