Should You Do Due Diligence Yourself When Buying A Business?

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Due Diligence Strategies Explained By Willard Michlin, CPA

How many attorneys have you seen that have successfully represented themselves in court?

How many doctors have you seen successfully conduct an operation on themselves?

Just as with doctors and lawyers, doing a business review or audit by yourself, in order to save a buck, does not work.

There is an old saying that applies here, "There is nothing more expensive than cheap."

When doing due diligence alone, without any assistance, you're allowing emotions to play a big part, eventually leading to a bad decision. I have actually seen buyers not hire someone to help them entirely because they didn't want to have their dream killed by the truth. Of course, later they wished they had gotten help, because that dream business they imagined in their head turned out to be nothing like the business they purchased.

You can do a large portion of the due diligence yourself, depending on your background, but you should never try to do it solely on your own. Let's go over a few of the reasons:

1. People hire a CPA or other qualified person because they need an expert opinion, and the more experience the expert has (not knowledge, but experience), the more valuable he is to you.

2. Everyone needs someone to bounce ideas off of. And everyone looks at the same information from a different perspective. Life experiences and different educations give us multiple points of view. If you are in a partnership where you and your partners always agree, you have one partner too many.

3. You always end up with a better deal when the final approval is subject to a second person's approval. When I bought businesses for myself, and had my Vice President approve my actions, I always found things about the business that allowed me to make a better deal.

Due Diligence for a small business can cost between $350 to $5,000. If the purchase price is $500,000 that is just one percent of the purchase price. And you're using it to give you some assurance that you are getting what you think you are paying for.

Can you buy any type of business insurance for only 1% of the face on the policy?

Categories: BizBen Blog Contributor, Buying A Business, Deal And Escrow Issues, Due Diligence Issues, How To Buy A Business

Contributor:

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence

Areas Served: California

Phone: 805-428-2063

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

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Comments Regarding This Blog Post

Contributor: Joe Ranieri, Business Broker: LA, Orange County Areas

As a broker, my advice to any client that has a question in regards to lease or books and records is that they should consult a lawyer or an accountant, especially if they are questions that are outside my level of expertise. As a broker, I facilitate the introductions to bother buyer and seller, and guide them a little with regards to which documents may want to be seen, but I'm careful that I don't get too involved, because I don't want it to look like I am putting my thumb on the scale. I can only represent what I am being told to by the seller.

Contributor: Due Diligence, Valuations Advisor

Having been on both sides of the due diligence process I find myself in agreement with all that has been previously written here, but would like to add a few observations of my own.

1) The buyer must have a realistic approach to the process or they are wasting their money paying for due diligence. If you are "in love" with your target acquisition and plan to proceed regardless, you are likely to end up with the wrong end of the win/loose stick.

2) The due diligence process can change the shape of the deal , often the price and terms will change, depending on what is found in the process. Some have to be killed off, be emotionally equipped to deal with that event.

3) First time buyers must have somebody on their side as they move through this process as there are tax and legal considerations that they generally are not in tune with.

4) Don't buy "plaques on the wall". All accountants and attorney's have plaques on the wall but there is a distinct difference in outcomes depending on their experience .There is such a thing as a transaction accountant and transaction attorney. You don't want to be paying for their education.

5) If you are coming from corporate America you may have awesome management skills, but self employment is different.

6) Somebody once said it is a smart man who knows what he does not know.

Helpful Resources To Assist In Selling And Buying California Businesses

Elizabeth McGovern: Escrow Services - San Francisco Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Janet Carrera: Escrow & Bulk Sale Service - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Helen Yoo, New Century Escrow - Escrow Services In Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Shalonda Chappel-Pilgram: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence

Prabhjot Randhawa, Broker: SF Bay Area, Central Valley

I'm a Business Advisor at Liberty Business Advisors of San Francisco. I have over 20 years of experience in all phases of entrepreneurship. During the past 15 years my concentration has been in business of mergers and consulting. I have owned and operated over 10 businesses. 209-815-3842 Cell.

Steve Zimmerman: Restaurant Broker Specialist, California

Steve founded Restaurant Realty in 1996. He has personally sold/leased over 900 restaurants, bars & clubs, & completed over 3000 valuations. The author of "Restaurant Dealmaker - An Insider's Trade Secrets For Buying a Restaurant, Bar or Club" available on Amazon. Reach Steve direct at 415-945-9701.

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