Lesson #5

Welcome to lesson #5 of “Learn How To Buy A Cash-Flowing Business In 5 Days.”

You’ve made it to the final lesson!

If you missed lesson #4 or want to refer back to it, you can find it here.

In today’s lesson, we'll wrap up by walking through how to conduct due diligence. We'll also talk about what vendors you'll need on your side to help you close a deal.

Let’s get started!

The vetting process is one of the most important parts of buying a business, and running your due diligence process in the correct order can save you both time and money. 

Today, I’ll share the process I recommend:

Once you come across a deal you’re interested in, the first thing you should do is run a broad market analysis to analyze the industry trends, market size, and competitive landscape, and identify potential market risks or opportunities.

If this checks out, you will want to request more information from the broker/seller. Oftentimes, a broker has already prepared a Confidential Information Memorandum (CIM) on a deal. At the minimum, you’ll want to see 3-5 years of past financials, more information on the customers, and information on the owner/team in place.

A couple of red flags I like to watch out for at this stage:

1. Key man risk (i.e. a business is completely reliant on the owner)

2. Customer concentration (i.e. a significant percentage of sales come from the top 1-2 customers)

3. Declining sales or major fluctuations in year-over-year sales 

4. Major fluctuations in margins

5. Cyclicality in the business

6. Unclear reason for sale 

If at this point you’re still interested in pursuing the business, the next step is to schedule a call or meeting with the seller. 

The goal of this stage is to understand as much as possible about the operations of the business, the risks, and growth opportunities. 

Here’s my list of 50+ seller interview questions that I like to ask on these calls. I highly recommend bookmarking this for later.

Remember: This call is also an opportunity to pitch yourself to the seller and what you bring to the table.

Still interested in the business at this point?

This is when you want to submit an LOI and structure the deal.

I won’t rehash what I’ve shared in the previous lesson, so refer back to Lesson #4 for more on this.

Get an LOI signed? Now the fun part begins.

You’ll want to conduct:

1. Operational due diligence

2. Financial due diligence

3. Legal due diligence

Step 1: Operational Due Diligence

I highly recommend meeting the seller and conducting a site visit.

This is the time to evaluate the quality and condition of any physical assets, understand the supply chain and operational processes, assess the management team and workforce, and review the systems and processes they have in place.

Step 2: Financial Due Diligence

The goal of financial diligence is to make sure the numbers of the business match up against what the seller has provided.

Unless you’re an expert, I highly recommend working with a CPA experienced with small business M&A transactions to run a Quality of Earnings (QoE) analysis. 

When the time is right, I’d be happy to make an introduction to a QoE partner I trust.

Step 3: Legal Due Diligence

In general, legal due diligence will consist of:

-Review of contracts and agreements (with customers, suppliers, employees).
-Examination of past or ongoing litigation.
-Compliance with relevant laws and regulations.
-Intellectual property rights and patents.

Again, unless you’re an expert, I highly recommend working with a lawyer experienced with small business M&A transactions to help you.

This lawyer can also help you draft a purchase agreement and any employee contracts you will need.

When the time is right, I’d be happy to make an introduction to a legal partner I trust.

Well done! You’ve made it through the final lesson. 

I hope this 5-day email course gave you a good overview of the business acquisition process.

At this point, you should have also received at least one edition of my regular newsletter that I send out on Tuesdays and Thursdays where I share the top 5 latest businesses for sale along with my breakdowns. 

If you’re ready to start your business buying journey, I’d also like to invite you to work with me directly to help you find a business to buy in the next 90 days and handhold through closing your first deal.

Buying a business can be a lonely journey and every deal has its nuances, which is why I take on a few clients every month and shepherd them through the process.

Learn more and book a call >>

I hope to speak with you soon.

-Helen Guo
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