How to Comprehensively Evaluate a Deal as a Self-Funded Searcher
Our War Stories series is a testament to why it’s important to evaluate your deal comprehensively as a self-funded searcher. Sometimes uncovering an unknown that might not seem very relevant is what will keep you from making a poor decision. This is even more important for self-funded searchers new to acquisitions who don’t have experience spotting issues.
Acquisitions are inherently a high-risk, high-reward business. If you make a great deal, you’ll be securing the lifestyle change you want and enabling the future you’ve been searching for. If you don’t fully evaluate your deal, you might get stuck in a business you can’t afford and lose your investment completely. Even if your deal seems perfect and feels right, doing thorough diligence will help you verify that you have solid reasons to feel that way.
Look Beyond Financials
There’s a difference between doing due diligence and doing due diligence thoroughly. That means taking into account the broader context of your target company. Don’t stop your due diligence process at evaluating financials. These documents only represent a fraction of what has made a business successful and the potential for that business to succeed in the future.
Consider how industry trajectory, business reputation, and an unstable customer base could impact your success as a new owner. None of that background will be found on financial statements. Get to know the full ecosystem that the company operates in including company culture, the industry, and sales cycle.
Keep in mind that great financials today do not always translate to great financials tomorrow—or day one after you take over. You need to ensure that you will be able to either replicate or enhance the current business model if you hope to make money. Understanding the full scope of the company ahead of time will help you do that.
Evaluate Important Relationships
Businesses don’t run themselves. People run businesses. You will need to depend on people to make your investment profitable. Whether that’s relying on the seller for advice after your deal or encouraging employees to trust your new leadership, it’s important to understand the social dynamics of a company. Understand if the existing team will remain after the deal or if you’ll need to restructure the company. How will that impact your business success?
Don’t forget to consider relationships outside of the company like the seller’s relationship with important clients and the business’s relationship with the industry and the local community. Find the employee who owns the sales relationship. Get to know them and how they work. Make sure that they will be able to continue making money for the business after the deal is done. Understand whether the reputation of the business in the industry and local community is a risk or a benefit. Will any of these relationships be something you need to cultivate or will they remain strong after ownership changes? Would you be capable of networking and forming better relationships if you need to?
The seller, current employees, and customers shaped the company into the entity that you’re interested in buying. Removing them or altering their role in the equation will inevitably change the results. You need to understand whether that change will be a problem for you as the new owner.
Be Cautious of the Seller
One of the biggest reasons to do a deep dive on your target company is that the seller is incentivized to lie—or at least present the truth through rose-colored glasses. You will pay multiples on each dollar the seller can convince you their company is worth. That means they will work very hard to present their company in a way that convinces you it is worth top dollar. Your job during due diligence is to understand whether that’s true. The evidence you gather that it’s not will be your leverage during negotiations.
As a side note, you should be careful with how you manage your relationship with the seller. While it’s true that they won’t be completely forthright, at the end of the day, they hold the keys to the kingdom. If your relationship turns sour, they might decide they don’t want to sell the company to you, they may not agree to terms that work for you, or they may not be helpful during the transition process if you do decide to buy. Be skeptical of the seller, but never let that tarnish your relationship. It’s more advantageous to keep your relationship friendly.
The thing to keep in mind is that the seller has an opposing motivation and the basis of their motivation will not always be obvious. Sometimes they are trying to saddle you with a failing company or a company in a soon-to-fail industry. Sometimes they want to make the most on the deal because they’re retirement and children are depending on it. They might be completely honorable and just hope to find someone they can trust to take the helm. They have motivations beyond your understanding. Go into your due diligence process with that caveat, and you will be sure to be thorough in your research.
During your due diligence process, there are many questions that you’ll need to ask. Find some important ones here:
