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Buying A Business? Think Due Diligence

Congratulations. You have just decided to purchase a business, merge with another company or invest in a someone else’s company. Exciting, isn’t it?

You have probably been busy learning the business, talking to the seller about the operation, conducting market research and planning how can you run it better than the previous owner.

It does not matter if you are buying a small cell phone store, a large high-tech company or investing in a friend’s “next big thing”. There is one thing you should seriously consider: a due diligence.

What is a due diligence and why is it so important?

One (very technical and boring) definition of a due diligence is: Due diligence can apply either narrowly to the process of verifying the data presented in a business plan or sales memorandum, or broadly as completing the investigation and analytical process that precedes a commitment to invest. The purpose is to determine the attractiveness, risks, and issues regarding a transaction with a potential investment. Due diligence should enable investment professionals to realize an effective decision process and optimize the deal terms.

In reality due diligence is a process in which potential buyer (or investor) investigate, analyze, inquire and try to learn as much as possible on the purchased business in order to verify the accuracy of the information provided by the seller.

Since the information provided by the seller is the basis for the buyer’s decision to buy (or not) and the purchase price, it is crucial that any buyer will verify that information before making the final commitment to invest.

How do you “due diligence”?

There several aspects of the business you should check:

Legal exposure

Technology and patents the business own

Business performance and financial position

Legal

Usually you need to contact the business’s lawyer and ask for a letter listing all the legal actions and claims the business is a party to. The goal here is to understand the legal risks that the business is facing: Is there any legal action against the business that could end in a judgment against it? What is the maximum exposure? How much will the lawyers charge to represent the business?

With the lawyer’s letter and the relevant information, you can go to the next level and hire your own layer to review the data and get a second opinion on those legal matters.

You should also ask for copies off all agreements, contracts or other binding understandings the business has with third parties. Here is a partial list:

Employment contract

Shareholders agreement

Leases

Purchasing agreement

Clients agreement

Licensing and royalties

Loan agreements

Technology and patents

If you are buying the business partially because of its technology or patents, you should assess the following:

Is the technology or patent actually registered on the business name?

In which jurisdictions?

When does the registration expire?

Has it been developed by the business, or does a third party could claim ownership of the technology / patent?

Ask for copies of all registration applications.

Once you have collected all the information about the technology / patents you can:

Retain a specialist who can assess the value of the technology

Retain a patent lawyer to assure the validity of the patents

Business performance and financial position

Most business sale transactions are based on either the business income / profits in the past few years, or the business assets and liabilities on the purchase date.

Therefore, it is extremely important to conduct a financial due diligence on the business before finalizing the deal.

What to do in a financial due diligence?

1. Check the company’s assets:

Cash – Ask for all bank statements, petty cash and all other locations in which cash is held. See if the total matches seller’s numbers.

Accounts Receivable – ask for a list of all customers who owe money to the business. See how long they have not paid. Inquire if there is a dispute with any of the customer and how much of the entire amount that owed will be actually paid (based on seller’s belief?) Focus on large amounts and long overdue accounts. If it is over 60 days it should be checked out. Call the customers to verify that their balance agree with the seller’s balance.

Inventory – Ask for a complete list of inventory items. Count the actual inventory and see it it matches the business inventory list. Ask for usage information, how much of each item is being shipped every week / month. If the shipped quantity is very low, it could indicate that this is a slow moving inventory item and that its value is minimal.

Other Assets – ask for a complete list of all other assets that the business owns. Identify the assets, locations and market value.

2. Check the company’s assets:

Accounts Payable – Ask for a list of all vendors the business owes money to. Verify the validity of the underlying transaction. Make sure the products they were suppose to deliver was in fact delivered and in good condition. Has installation been provided? What are the payment terms?

Bank and other loans – Ask for loan agreements. Check the payment schedule, go back and track past payment and verify that the listed outstanding balance is correct. Inquire about the loan’s rate and terms and can it be refinanced for a lower rate loan? Learn if the loan is collateralized and by what assets?

Other liabilities – Ask for a complete list of all other liabilities. For each one, run the same inquiries as we have suggested for Accounts Payable and Loans.

Note – a very important goal of the due diligence is to find out if there are liabilities not listed or disclosed by the seller. You need to verify that there are no additional debt to suppliers, banks, other loan providers or any other undisclosed amounts.

3. Check the company’s income and expenses:

Sales – ask for list of all sales transactions in the past 3 years. Go through them. Ask for documentation of the largest ones: Customer Purchase Orders, Invoices, Shipping Slips and Receipts. Make sure that the transactions have been actually paid by the customer and if not that it will be paid according to the company’s credit terms. Compare the total sales of the three years to see if the business is growing, shrinking or in a stagnation.

Expenses – Ask for a breakdown of each expenses. You should first focus on inventory purchase. See how much the products cost, for how much it being sold for and what is the profit on each item. Track the purchases of the inventory to the sale transaction to see the full cycle. After inventory purchases go through all other expenses to verify the authenticity of each transaction. A partial list of expenses includes:

- Wages and Benefits

- Marketing and Sales

- Rent and Utilities

- Legal and Accounting

- Office Expenses and Supplies

- Taxes

- Travel

- Interest and Finance Charges

- Outside Service and Subcontractors

As with liabilities you should look for unrecorded expenses to understand the true and actual expenses rate of the business so you will have no future surprises.

Conclusion

Buying a business is a huge investment you make. To make sure that “what you see is what you get” you should conduct a due diligence.

This article describes ways and points you should focus on when conducting the due diligence.

And as always, there is no substitute to retaining a professional who understands due diligence and have the right experience. When buying a business you should really consult with an accountant and make sure you cover all bases.

12 Steps To Home Business Success

So, you have decided to venture into a home business — where you work for yourself and greatly reap the fruits of your labor. However, there are some bad news and good news that you should be aware of.

BAD NEWS: Studies show that 80-90% of home businesses fail.

GOOD NEWS: Your business can be among the 10-20% that actually succeed!

How? By following the “12 Steps To Home Business Success.” And you can do that with PEP!

*P – PREPARING/PLANNING EXTENSIVELY

When you do decide to venture into a home business, the very next thing to do is prepare for it. Prepare a business plan. This will be the very foundation of your business. You can do this by following these steps:

1) Start with the basics.

What type of business would you like to get into? Would you be selling products, would you be offering services, or would you like to try both? In any case, you must decide on which particular product and/or service you would want to focus.

Have difficulty deciding? Here’s a simple but sure-fire tip: Focus on what you know and enjoy.

If you have a talent in writing and editing, you can venture into an editorial services business. Are you into graphic arts? Can you design/layout brochures, business cards, newsletters, etc. using your computer? Then you can get into desktop publishing.

Do you know how Bill Gates, the richest man in the world, reached the pinnacle of success? He decided to venture into the one thing that he loved — computers.

So, whatever type of business and whatever product or service you decide to start with, always make sure that you are familiar with it and that you have passion for it. The first will save you time, the second will keep you motivated.

When you are already decided about the type of venture you want, think of a name for your business. Make sure that it is unique, easy to remember, and professional. Of course, also make sure that it is significantly related to your business.

2) Gather your resources.

You cannot put up a business without a capital. This includes the monetary or financial capital, material capital (supplies, gadgets, etc.), and manpower. Do you think you are prepared to invest all this into your business?

3) Draw out your goals and set your mind into them.

Set general goals and specific ones. Formulate short-term goals and long-term ones. What do you aspire to achieve in one month, three months, six months, one year?

Visualize your goals. Have a vivid image of each goal in your mind. How do you see yourself a year or two from now?

Have a list of your goals on hand. Read your list regularly. Did you know that by merely doing so, you actually increase your home business success rate by 100%?

*E – ESTABLISHING YOUR BUSINESS.

This stage refers to the actual nitty-gritty of setting up your home business. This time, you are done with conceptualization and you are ready to get into action. You are now implementing the plan that you have prepared. Here are several steps that will help you establish your home business and achieve home business success:

4) Work on the legal requirements of your home business.

For your venture to be a legal business entity, you need to work on certain formalities. These include registering your business name, applying for a business permit/license, setting up a taxation system, and other paperwork. In this step, you also formulate a compensation plan for your employees.

5) Devise a marketing plan.

How do you create exposure for your products and/or services? Formulate a creative, innovative marketing plan. Consider the following factors/concerns:

>Your target market. Clearly define your target market. This will help you decide which advertising and promotion strategies would be more appropriate to draw in your prospective clients/customers.

>Your products/services. Of course, your advertising and promotion techniques will greatly depend on the type of products/services that you sell/offer. Make sure your strategies will “sell” your products/services. If you are offering graphic designing services and you give out poorly-made flyers, you will surely attract no clients at all.

>Your resources. You cannot aspire for grand and complicated advertisements if you are limited by financial constraints. You can, however, maximize whatever resources are available to you to effectively promote your product. Take advantage of the Internet. By using e-mail, blogging, forums, etc., you can spread the word about your business in a flash!

>Your uniqueness. “Same-old, same-old” will give you no gold. You can still utilize the most common advertising/promotion strategies, but give them a twist. Think of the most creative ways to catch — and hold! — your customers’ attention. Make offers they can’t resist.

6) Formulate a Daily Method of Operation (DMO).

Make sure that your Daily Method of Operation is practicable, realistic, and goal-oriented. Set specific things to be done during specific hours. Set your priorities for each day. Make sure that such tasks can really be done and that they are done for the purpose of reaching your goals.

7) Manage your time effectively.

Although you practically have time in your own hands and you are your own boss, it does not mean that you can sit back and relax all you want. In fact, you must be more cautious about spending your time because your home business success depends on you — the time and efforts that you commit to your venture.

*P – POWERING UP.

Your home business is already established based on your plan. Can you now just relax and watch the cash flowing in? Of course not! Maintaining a successful home business entails exactly that — “maintenance.” You need to continue working for your home business success. Here are some steps to power up your home business:

8) Aim for your personal development.

How do you develop your personality and how can this help you achieve home business success? Consider the following ways:

>Be educated. Continue learning about your business, as well as about yourself. Participate in meaningful seminars and workshops. Read a lot, especially the stories of successful people. See what you can learn from any situation that you get into. Make each day a learning experience.

>Be motivated. Read inspirational stories. Listen to motivational news.

>Be sociable. Of course, you need to interact with other people; otherwise, you cannot do business with them. But besides that and more so, you need to socialize with other people and learn from them. Exchange tips with them. Learn from their mistakes and be inspired by their triumphs.

>Be an inspiration. Aim for your personal growth and inspire others. If you want to see positive changes in your home business or your financial life, you should first strive to achieve inner growth. Grow from within and develop the without as well.

9) Develop the desirable or must-have traits for home business success.

In connection with step number 8, here are other traits that you should develop for you to achieve success in your home business:

>The 3 P’s – Patience, Persistence/Perseverance, Passion

>The 3 D’s – Desire, Discipline, Determination

>The 3 C’s – Courage, Confidence, Consistency

10) Take care of your health.

This looks too simple, but it is very important in any business endeavor and many people tend to take it for granted. How can you work on your business and attain success if your physical being is poor? Eat a balanced diet. Exercise regularly. Monitor your stress level. Stay physically fit and enjoy your home business feat!

11) Have a balanced life.

Your home business success will not be as meaningful if you do not have success in your personal life. Do not surrender all of yourself to your business. Even Bill Gates takes a week of rest and solitude every month. Have that needed rest. Spend quality time with your loved ones. You will see that as you rejuvenate yourself, you will be more productive and even more prepared to face the various challenges that your home business may pose. Take time to enjoy life, for that, indeed, is the very purpose of your financial success!

12) Have the right mindset.

Do your best and believe that you can and will succeed. Never give up. If Thomas Alva Edison quit when he failed after thousands of trials, we wouldn’t be enjoying the benefits of the electric light bulb today. As the great inventor aptly put it: “Many of life’s failures are done by people who did not realize how close they were to success when they gave up.”

Yes, you can venture into a home business and enjoy your life. Just follow the “12 Steps To Home Business Success”!