Due Diligence - would you pay for it?
Discussion
I'd appreciate your thoughts on commercial due diligence. I'm a consultant in the IT industry and do a lot of technology due-diligence work for a very large global IT company. I assess the design & architecture of technology products and also advise on the suitability of strategic partnerships & acquisition targets. I've become very good at weeding out 'unsuitable' companies. I've got a reputation for asking the most difficult and probing of questions and have probably saved my client tens of millions over the years.
More recently, a colleague asked me to help her brother assess an engineering company he wanted to buy and I undertook some commercial due diligence and dug up all sorts of 'hidden' facts about the business. It was fundamentally a sound business but over-priced and we used the info we discovered to our advantage and I negotiated a £120k reduction in the price. On the back of this I got an intro to someone else who wanted to buy a florists and asked me to assess the business. Again we found a bunch of anomalies (e.g. over-valued assets and some supplier issues) and I got the price down from £90k to £62k. I did both of these pieces of work as favours for friends but found it very interesting and I think I'd like to do more of it (and get paid for it too).
Last night a mate was telling me about his father's new business - he used his retirement fund to buy a 'water cooler' round off a chap last September and the business (not surprisingly) has fallen off a cliff since then. They've also discovered that the previous owner was paying 'protection' money to a local gang (who've come calling). Not only that but my mate's father paid the full asking price (£45k for a 4 year old transit and not much in the way of goodwill). I would like to think that given the opportunity I could have spotted the problems and steered him clear.
So I was wondering... I used to think that a good accountant or lawyer would offer DD services but in both the purchases I helped with neither were interested. Indeed, the business transfer agent selling the florists was particularly put out that I had discovered so much about the business and told me that no one had ever done such a thing before (really?)
Whilst I have sold/bought businesses myself it is clear to me that not all buyers are comfortable with negotiation and certainly don't know what questions to ask. I wonder if enough of them would pay good money for me to help them out? Do you think there is a genuine business opportunity to help small business buyers with DD and purchase negotiation or is this amply covered by other providers?
More recently, a colleague asked me to help her brother assess an engineering company he wanted to buy and I undertook some commercial due diligence and dug up all sorts of 'hidden' facts about the business. It was fundamentally a sound business but over-priced and we used the info we discovered to our advantage and I negotiated a £120k reduction in the price. On the back of this I got an intro to someone else who wanted to buy a florists and asked me to assess the business. Again we found a bunch of anomalies (e.g. over-valued assets and some supplier issues) and I got the price down from £90k to £62k. I did both of these pieces of work as favours for friends but found it very interesting and I think I'd like to do more of it (and get paid for it too).
Last night a mate was telling me about his father's new business - he used his retirement fund to buy a 'water cooler' round off a chap last September and the business (not surprisingly) has fallen off a cliff since then. They've also discovered that the previous owner was paying 'protection' money to a local gang (who've come calling). Not only that but my mate's father paid the full asking price (£45k for a 4 year old transit and not much in the way of goodwill). I would like to think that given the opportunity I could have spotted the problems and steered him clear.
So I was wondering... I used to think that a good accountant or lawyer would offer DD services but in both the purchases I helped with neither were interested. Indeed, the business transfer agent selling the florists was particularly put out that I had discovered so much about the business and told me that no one had ever done such a thing before (really?)
Whilst I have sold/bought businesses myself it is clear to me that not all buyers are comfortable with negotiation and certainly don't know what questions to ask. I wonder if enough of them would pay good money for me to help them out? Do you think there is a genuine business opportunity to help small business buyers with DD and purchase negotiation or is this amply covered by other providers?
If you are going down this route of providing due diligence work you have to ensure you set out a scope of work and stick to it, otherwise you could find yourself on the end of a law suit if something is missed that they thought you should review. We also include the work that we specifically won't undertake on an assignment so everyone is clear. I assume for example that you wouldn't look at tax aspects, which can be a signifcant area of potential exposure.
Our firm sees what happens when DD goes wrong as they provide expert opinions in various court cases.
Our firm sees what happens when DD goes wrong as they provide expert opinions in various court cases.
To answer your question - yes I would pay for it
I think that it is a fundamental of any deal. The transactions your are talking about seem to be on a small scale, so I expect that you could get referals from accountancy practices etc.
This is how some of the big boys make a lot of cash
I think that it is a fundamental of any deal. The transactions your are talking about seem to be on a small scale, so I expect that you could get referals from accountancy practices etc.
This is how some of the big boys make a lot of cash
I would pay for it, and many others would if they were in a 'win-win' situation.
For example the price could be a negligible amount, plus a percentage of the 'saving' attained by the buyer.
For example, paying £10,000 for your services seems expensive, however if you effectively negotiated a selling price £100k lower, then it is quite cheap!
For example the price could be a negligible amount, plus a percentage of the 'saving' attained by the buyer.
For example, paying £10,000 for your services seems expensive, however if you effectively negotiated a selling price £100k lower, then it is quite cheap!
Boosted LS1 said:
If you charge a percentage of the saving's your client will see that you will want to provide a better service for them. Could be win win. You could have a tiered system.
First, the OP would probably have to avoid referrals from agents, because they'd fairly quickly work out that they should inflate the sale price to offset the "saving" that would be achieved. It would take on the features of a scam, however unwitting the OP was.Second, payment by results is all very well, but it also sets up an expectation that, if no significant saving is achieved, then somehow no work has been done. Clients are paying for certainty, not for skeletons (hidden or otherwise). The professional opinion that a company is sound and as-described is just as valuable than the counter opinion. So there has to be an incentive for the OP to do a thorough job on businesses he can see are clearly not hiding anything.
Third, does the OP want the reputation of being the man you call if you want to buy a basket-case business?
Oh, and, fourth: what happens to the fee if the sale doesn't go through?
Having undertaken a lot of research and consultancy work, I'd agree with the poster who opined that the scope is the key. I would add that managing expectations is just as important. It is actually very, very difficult to write a scope which covers every eventuality. This is why many consultants are simply engaged on a day-rate, with a scope which changes often (but with properly-documented change-requests for back-covering).
Overall, yes, I'd say there was a definite market here, especially if the OP enjoys it and does a good job. The only difficulty, if not an accountant or similar, may be in obtaining professional indemnity insurance, especially to the level necessary. It may work out to be more cost-effective for the OP to find an accountantcy practice keen to expand its business consultancy service who would join forces with the OP, bringing the OP under the practices' PI policy.
Anyone would be bonkers not to carry out DD on buying a business. Most houses are worth a fraction of a business - but people still get a survey done. And there's a hell of a lot more to a business than a house!
One business modely you could propose to the purchaser (who is wavering as to the benefits of DD) is say to them "you pay me X% of any reduction in price due to hidden issues".
One business modely you could propose to the purchaser (who is wavering as to the benefits of DD) is say to them "you pay me X% of any reduction in price due to hidden issues".
I've bought a couple of businesses and did virtually no DD on either. However, there was a strong incentive for the sellers in both cases to tell the truth - they were paid a percentage on completion, and the bulk after 12 months. So in effect, the price wasn't set until we had been in control of the businesses for 12 months, and had spotted any flaws.
Worked very well for us.
Worked very well for us.
Yes I would pay for it (and have done) but, with respect, I'm not sure I'd pay someone without a professional qualification and suitable indemnity insurance. Where do you stand if you miss something crucial? The subsequent lawsuit could wipe out your personal assets.
Tread carefully here.
Tread carefully here.
seaninog said:
Yes I would pay for it (and have done) but, with respect, I'm not sure I'd pay someone without a professional qualification and suitable indemnity insurance. Where do you stand if you miss something crucial? The subsequent lawsuit could wipe out your personal assets.
Tread carefully here.
I can't imagine a circumstance where the OP would be advised to do anything other than trade through a Limited Company. Assuming his Ts & Cs are properly worded, and that he isn't a complete idiot, then that should take care of the "wipe out your personal assets" scenario - his assets would not be at risk.Tread carefully here.
+1 for PII - that goes without saying in this area, I'd hope; even if the contract is "I do what I think is reasonable for £1000 per day" there is still a risk.
That said, can anyone help me with Barristers' Ts & Cs? Since they seem to be able to get away with expressing an opinion which, even if wrong, is not actionable, that could be a model to follow.
As for professional qualifications, is there anything relevant to this? Accountancy would be an obvious one, but a lot depends upon the precise scope.
This "feels" more like "private investigation" or even "risk consulting" than traditional "due diligence".
As another poster has already commented, surely some form of insurance for yourself would be a nessecity? I don't know much about buying businesses etc, but if I was buying one, I would want to make sure I knew it inside out before I bought it. When buying a house or boat, its very unusual not to have a survey taken out isnt it? Every one of those surveyors is fully insured up to their eye lids, just in case they do miss something and the customer turns sour
I work for a top 10 accountancy firm. I'm a chartered accountant and I undertake Financial Due Diligence.
Within my firm we have other suitably qualified specialists to offer Commercial Due Diligence and HR Due Diligence. When Legal Due Diligence is required we will work in partnership with a firm of qualified lawyers who will undertake the Legal DD. We will share info about the target (so as not to place undue burden on the target in supplying info twice) but we each have a seperate engagement and seperate fee with the client. As well as identifying the existance or not of any 'skeletons' part of our work is to identify suitable warranties and indemnities required and we will work with the lawyers to ensure that these are included in the Sale and Purchase agreemend. We will also assist in drafting the financial aspects of the SPA (things like earn out payments etc).
My firm charges fixed fees whatever the findings, whether the deal completes or not and whether a saving on price is achieved or not. (The flat fee is based on an estimate of time required and staff required, as well as benchmarking our competitors.) We build a reputation for doing a good thorough job and providing relevant useful information.
Within my firm we have other suitably qualified specialists to offer Commercial Due Diligence and HR Due Diligence. When Legal Due Diligence is required we will work in partnership with a firm of qualified lawyers who will undertake the Legal DD. We will share info about the target (so as not to place undue burden on the target in supplying info twice) but we each have a seperate engagement and seperate fee with the client. As well as identifying the existance or not of any 'skeletons' part of our work is to identify suitable warranties and indemnities required and we will work with the lawyers to ensure that these are included in the Sale and Purchase agreemend. We will also assist in drafting the financial aspects of the SPA (things like earn out payments etc).
My firm charges fixed fees whatever the findings, whether the deal completes or not and whether a saving on price is achieved or not. (The flat fee is based on an estimate of time required and staff required, as well as benchmarking our competitors.) We build a reputation for doing a good thorough job and providing relevant useful information.
I did this type of thing a while back, and for US companies. If you are going to do it seriously, for money, you need to limit your liabilities to the full extent allowed by law, since they can come after you personally. The way I did it, which may not be right for you, is to set up a ltd company and had professionally drafted consultancy agreements for each client. You are then an employee/director of this company. The agreements had the usual caveats that you cannot guarantee you will find everything (how can you?) and limit your liability to the fee attached to the job. The worst that can happen is that you lose your house because a client comes after you for damages; the best that can happen is that you only need work 10 days a month.
All the above is customary. Also, if you develop any intellectual property, it is customary that you the conultant own it, and grant the client a royalty free license in perpetuity.
All the above is customary. Also, if you develop any intellectual property, it is customary that you the conultant own it, and grant the client a royalty free license in perpetuity.
Edited by 456mgt on Tuesday 10th February 09:09
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