Ronald Reagan famously said Trust BUT Verify, when speaking about nuclear disarmament. No statement rings as true when you are an entrepreneur. It is your job to make sure that you are making the best decision for your business and your bottom line. Overtime I have crafted and honed my trust but verify skills and have become adept at conducting due diligence.
What is Due Diligence?
Due Diligence is defined as:
a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.
Often new entrepreneurs, business owners, or investors believe that they can just wing this part of decision making and rely solely on their intuition or few meetings before deciding, but this is not sufficient.
Due diligence should be under taken for any decision that you are considering—new partnerships, accepting funding, selecting vendors and yes even taking on large customers that may have a large impact to your bottom line. Each of these reasons carry a different set of questions and level of scrutiny.
Here are few tips to get started and potential red flags:
1. ALWAYS ASK FOR DOCUMENTATION
Due diligence generally starts after several meetings regarding the collaboration. It is imperative that these meeting be followed up with getting the terms in writing. Once this happens then begin to ask for the pertinent documents. For example: if you are deciding whether to make an investment into a business that business should be able to give you their plan for growth in writing.
RED FLAG: If the target is unable or unwilling to put things in writing or if they have not taken time to commit their plans to paper they may not be a good partner. If you get a tremendous amount of push back RUN!
2. ASK FOR PREVIOUS PROJECTS COMPLETED AND RESULTS
If you are selecting a vendor always ask for references and examples of other projects. Be sure to ask the about key metrics including outcomes, time to completion, challenges, and any delays or deviation from the original project or schedule.
RED FLAG: While no two projects are ever the same be careful if the firm cannot directly speak to their experience. They may be learning on your dime and that can be costly or lead to less than optimal results. If you are interested in working with a less experienced firm be sure to provide lots of oversight and feedback or pair them a more senior adviser to ensure you stay on course.
3. REVIEW THE FINANCIALS
Even a quick review of a company’s finances can be very beneficial. This is especially true when you are selecting vendors, deciding on merger, or making a charitable contribution. Be sure to look for things like month to month cash flow, cost of goods, and operations costs. A bloated budget or insufficient funding into key areas can be very informative from a company health perspective.
RED FLAG: If a company cannot produce basic bookkeeping head for the hills. If there is no financial records or if they are poorly constructed that gives you critical insight into the priorities and potential risk associated with working with the organization.
4. CALL CUSTOMERS OR REFERENCES
Getting a third-party opinion can be more informative than speaking to the owners. References can offer insight into the company’s character while customers can show you what their commitment to service and quality are like. I would speak to the reference and customers yourself rather than accepting written accounts.
RED FLAG: If the company insists on being present for any conversations they may be attempting to control the conversation or the narrative. A company confident in its work product will have no issue providing you with a names and numbers.
5. READ THE CONTRACT
Yes, read the contract! I see many disputes arise because one or both parties did not actually read what the contract says. This is critical. I always advise any contract review and interpretation occur with a BUSINESS attorney. Not your cousin who does divorces not your smart niece that wants to be an attorney. Use a licensed attorney. Be sure you understand what the contract says and what your obligations are.
RED FLAG: If you are not given a chance to make edits to a contract you should proceed with caution. Generally, contracts favor the person who wrote it. That means if they unwilling to allow for consideration of your comments that may be indicative of how the relationship will go. This is not to say that there may be portions that are non-negotiable but that generally is not the entire project.
Arm yourself with information before deciding.
For expert help on conducting due diligence give RW Capital Partners a Call!
Dr. Shante Williams is a serial entrepreneur who started slow and in the shallow end of the business pool. She has worked in Biotech, Big Pharma, Green Energy, and Academia