Due Diligence is more than being able to check off boxes when doing research to purchase a business, as there are varying levels to what should be confirmed about the business in question.
In this Minority Business Access, Solomon RC Ali does his due diligence to share how deeply one should research before taking the plunge to purchase a business or invest in it. To master how the money “moves” within a business, Solomon RC Ali suggests researching three years’ worth of the business’s historical numbers, among other strategies. He stresses that having the right sized team factors into due diligence being completed within a reasonable timeframe, and how the various mindsets of a diverse team help to drill down details. When it comes to mergers and acquisitions, it is important to know what you know, so just do your research.
Watch the episode here:
Listen to the podcast here:
JUST “DUE” IT
I am so glad to be back here with you again to share another episode. We’re going to talk about due diligence. The team has gone out and found an exciting video that talks about it. They give a whole bunch of nice awesome points and we’re going to collaborate a little bit. I’m going to weigh in and we’re going to get right to the nitty-gritty on it. If you have questions, please don’t be afraid to reach out to us. Ask your questions, get an answer. Someone on my team will answer. Go to SolomonRCAli.info. Get your questions answered. Don’t take the next step being uncertain and unsure of what to do.
Trust me when I say it’s a minefield. You need someone to help navigate you through that minefield, whether it’s Maine, MacKenzie or whoever consulting company you can go to that can help and guide you. You need to get help so that you can navigate the minefield. You have to go to people who already know, been there, done that. It’s very important. Thank you so very much for tuning in to the show. I hope we give you some important information that you can use in your journey to becoming successful because it is truly all up to you. We’re going to get started with how to do due diligence, what it’s all about, and some key things. You may want to read it a few times.
Do The Work And Investigate The Numbers
“Welcome to The Finance Storyteller series. This video covers ten tips for solid due diligence in a merger and acquisition setting. First of all, take it seriously. Due diligence is much like the process you would go through when buying a house. The seller has an obligation to disclose significant items related to the condition and history of the property. It’s the buyer’s responsibility to be completely aware of past problems before signing on the dotted line. Be aware that the due diligence isn’t a quick check the boxes exercise in between the deal negotiation and the official deal signing.”
What he’s talking about is good stuff. Due diligence is like doing the due diligence on a home. It’s a little more complicated than that. You have to investigate the historical numbers. You’re looking at three years of historical numbers. In the business, sometimes you may even need to look at three years of historical numbers on the person themselves. If you’re buying a business or planning on loaning the company money, you going to want to do this. Three years of historical numbers on the business and on the person or the owners of that business because you’re looking to see how the money interacts and goes from the business to the owners and back and forth. You’re also looking to see if there’s any commingling. Commingling is when the money goes back and forth. In your due diligence process, don’t be afraid and don’t be intimidated by it. You’re being the investigator. Remember due diligence, investigator, homework means all the same thing. What you’re going to do is start with the financials on the business, then you’re going to move to the personal financials if you’re buying the business.Due diligence is very important to your success in investing, running, and managing a company. Click To Tweet
If you’re an investor looking to buy into a stock, you’re going to look at all the company’s financials. You’re not going to look at the person’s personal finances. If you are an investor buying stock, most of the time that means you’re going to be buying stock retail to determine whether or not it’s a good investment. You will only be looking at the business financials. You will be looking at their 10-Ks, Qs, and 8-Ks. Those are the financials you would be looking at. You’ll be reading the MD&A section. It must be done. You don’t want to say, “I pulled it offline. I’m checking the box. I had the company give it to me. It’s done.” You have to read it. Some of it, you may have to cross-compare it to the competition that’s out there. It’s very important.
One of the things that Solomon RC Ali Corporation does is this. When we’re looking to help a company, we pulled both their personal as well as the business because we got to help them put a strategic plan together to be able to scale their business. We’re looking at what has been their pitfalls, their great success, what makes the business run, how well and efficient have they been running a business? We try to determine all of that. We also want to know the weaknesses so that we can shore up those weaknesses when we’re helping them to put their package and everything together for their strategic growth. That way, we can arrange the money for them and then they’ll get access to the type of monies that they need to go off, do bigger and better things.
Another thing when we are doing due diligence, we are looking doing it on several or multiple acquisitions at one time. When we turn around, is the company financeable? Does the company have the ability to leverage its credit and any assets? These are the types of things that we’re looking for and that helps us to come up with the right strategy. We’re going to get back to the video and see what he has to say. I’m going to chime in more on this one than I have in the past because this is a very valuable tool. It’s very important to your success in investing, running and managing a company.
Have The Right Due Diligence Team
“If the outcome of the due diligence is not satisfactory, it might lead to cancellation of the deal. On the flip side, be careful not to get carried away with insignificant items. We are looking for material risks and want to see things from the right perspective. Due diligence is resource constraint and time-sensitive by definition. How many people should you have on the due diligence team? How much time do you plan for it? Be aware that due diligence is very hard work both for the team on the buyer side as well as the team on the seller side. If you overdo it, due diligence might get in the way of normal business operations.”
There’s no doubt about it because the seller has to provide information constantly to you. Sometimes if they don’t have other people that can get them, it’s going to affect their day-to-day operations. At SolomonRCAli.info, we have attorneys, accountants, auditors, independent people and pretty much about this many people, twelve or we’ll probably have a few more than that. I’m being serious. We have people who are looking at different parts of the information. We have a 7 or 8 pages due diligence package that has seven parts and like the government that each part has sell parts all the way through. By the time you turn stuff in, you’ll turn it as files and there’s about 1.5 foot or 2 feet beat. It’s huge. That being said but the experts and attorneys are looking and examining their contracts. They’re telling us what contracts are weak, which contracts may hold up, may not hold up in court, what contracts can be leverage and why they can or cannot be leveraged.
The accounting people are telling us different things. They are telling to say whether or not the books are correct and in the right order and they place everything there. You’ll be surprised how many people have accountants. Their books are totally screwed up and wrong. Because their management team or CEO doesn’t know accounting, what they figure is, “I gave all the information to them, I thought they will put it together correctly.” We come across that a lot. We also have finance people there. They are letting us know, “Based on these numbers, we can finance this or that. That’s how this particular group would look at it.”
That’s a lot of what I do as well, is get there and say, “This will be financeable with Wells Fargo or Bank of America. It meets their criteria. No, it can’t go there. We’re going to have to go to private financing like a private equity company, a network of investors, or investment pool investment club.” In different places, we have to take you to arrange the capital based on your historical numbers and what’s has been done. That’s very important. That’s all discovered in the due diligence and the plan comes out of the due diligence.
Don’t be embarrassed or ashamed of the work that you’ve done in the past or the professions you were supposed to do. You’re coming to a high end at the end of the day to put a very important plan together for you for the scalability and growth of your company. You’re ready to take it to the next level. That’s why you’re bringing in a Solomon RC Ali Corporation team to take you to the next level. You’re looking to be, “I had 1 or 2 locations. I was a mom-and-pop. Now I’m looking to be a mid-size or a regional company.” Those are the reasons we do, things we do and look for. We have marketing people that will look at it from their marketing hat and say, “This is how this would be marketed.” That’s what makes up our due diligence team when we’re looking at something. Our people are pretty professional when they get down to it then you have me. I don’t get where I get to buy us most as I get there by doing the work. We do the work.
In the due diligence, something that I failed to mention that’s very important. I saw a manufacturer at the bottom here and that’s taxes. You have to have a good tax professional. I do mean a tax attorney. Don’t get someone that does taxes every year. You need a tax attorney that understands the complex if there are multiple locations within the business. If you’re buying a company that has 6 or 7 different units, be it a subsidiary or a division. Like here, you have the flagship and they have five subsidiaries. That’s maybe in California, Jersey, Texas, Charlotte and this one might be in Europe. There are tax things that you have to take a look at that need to be done in the due diligence to help you to determine what the tax breaks are or if you do this or buying it, are there going to be tax consequences? If you’re selling it, what’s the tax consequences? Due diligence is very important.
If you’re looking to borrow some money, typically there won’t be a tax consequence. You might have what’s called a net operating loss. If you have that, here’s something that you don’t know, there are people out there who are looking to invest in your company to take advantage of the loss so that they can bring their taxes down. You should be shocked. I was when I first found out about that. I was like, “If I do this deal, the person that don’t want to take or operate my company, they are looking for a good tax break.” They invest heavily in my company.
Normally, they require a certain interest in the company so that they are able to take advantage of the tax break and the losses that I have had in my previous years. That’s extremely important to know. That’s where A Solomon RC Ali Corporation comes in. We do the due diligence and the homework. We’re not guessing here. We’re putting in a very difficult plan together for the growth of your company. All we ask is for complete honesty and transparency so we can get it done. Let’s go back to the video. When he’s saying stuff, I’m chiming in and giving you other pieces of information, you need to know.
“On the other hand, if you don’t assign sufficient time or resources, you might not get the quality you need. Assess the size and complexity of the business before you decide on the team size and duration of the due diligence. Put together a diverse team. Every person has their perspective on the world. In due diligence, you need to look at things from as many perspectives as you can to capture as many insights as possible. Make sure you put together a diverse team in age, gender and functional backgrounds. Don’t leave the due diligence to the finance team or the legal team but make sure you also have commercial technical, IT, operations, logistics, manufacturing, sourcing and HR experts involved depending on the nature of the business you are investigating.”
Understand The Stakes
He’s talking if you’re selling your business right now to how to put the team together. When you hire the right consultant forum, we have a team that is very proficient in all the different areas. We keep adding on to the team based on your business itself. If we’re investing in you or going to take the time to arrange capital for you, we have to know everything about your business so that your business is presentable to the investors and the banks. That’s the whole key. In other words, we’re going to tell you, when you go sit down, we’re going to require you to wear a suit and tie. Some of you guys right now in the day and age want to wear a suit with no tie. You probably might not be going to get any money. They’re not going to say it. They’re going to think you look good and cool. Put the tie on. Don’t be a jerk. You’re trying to get something. Go like you’re going to church. You’re the one that’s looking for a favor, grace, some mercy, you’re looking to either get investors to come into your business, to believe in you. Dress the part.
Industry insight is extremely important. I didn’t see that up here but you got to have people who have industry insight. If I’m the one on the seller side, I’m not relying on my team in my day-to-day people who run the operations to give all the industry insight. I’m writing in a third part because I need to know what my competition is truly doing. I need to know how they’re doing it so that when I go look for money, I’m able to turn around and pitch, “This is what the competition is doing. This is how we’re doing. Here’s our secret sauce and here’s why It will work.”You need to look at things from as many perspectives as you can to capture as many insights as possible. Click To Tweet
If I’m on the buyer side, I’m doing the same thing. I’m bringing in some extra because I’m trying not to lose my money. You better believe when you’re talking to investors, they’re going to look at your information and not trying to put holes in it. They’re trying to tear it apart. They’re trying to see where the holes are because once they put their money in it, they drill it all out on the brow. You need to understand that. It’s very important. I know I’m putting money in it. I’m tearing every single thing and question every single thing you have to say in ten different ways.
I’m serious about that because I’m investing real money. I know what the money is worth. I don’t know what your vision in your company is worth. I know what you’re hoping that it might be worth. I know what you say you’re willing to work for. The right team is very important in due diligence. You go through a creative financing process. You’re not going to go through, “We’re looking at mergers and acquisitions. Is it more positioned for a joint venture? Is it positioned to go public? What’s the investment strategy?” That’s what that due diligence helps to determine. We’re going to get back to the video. Please keep reading this stuff back so you can get familiar with it.
“Thing to consider here is what the stakes are for each of the members in the team. Do they stand to gain or lose from the deal financially or career-wise that could impact a judgment? You want to select team members that are as objective as possible and need some independent external third-party team members for balance and credibility. Confidentiality, due diligence is an intense project with long hours at all kinds of locations, including planes and trains, overheated conference rooms and possibly, local Starbucks. Be careful when discussing your due diligence. If you need to have a confidential discussion, do it at a safe location. Always use the codename for the acquisition target and make sure you come up with one that is not too obvious or too common.”
Always Have Solid Documentations And Clear Communication
“You won’t be the first team that ever does the due diligence, so build on the expertise of others that have gone before you. There are generic checklists out there as well as industry-specific ones. Do consider that the company you are investigating is unique and you need to brainstorm with your team what the risk areas are. A useful tool for this is something called the Failure Modes Effects Analysis from the world of project management and Six Sigma. You brainstorm worst-case scenarios, things that could go terribly wrong and rate them on impact as well as likelihood. That helps you to prioritize the areas to investigate. After the site visits, document reviews and interviews are done, take your time to write a comprehensive report of your due diligence findings. Upfront, you need an executive summary.”
If you hire Solomon RC Ali Corporation, whether it’s on the buyer side or the seller side, we normally farm this piece out. That report is going to come from an independent third party. It’s going to have a lot more credibility than what a Solomon RC Ali Corporation says. We will hire the people to give an earnest opinion and evaluation of the company, then they’ll write that out and say what their recommendations are and why this is their recommendation. It could be positive or negative but it will be true and from a third party. That’s very important to know. It’s not a document like if you’re using us, we use a lot of subcontractors and vendors that come together to give us what we need. We fell into a more earnest way of getting the credibility.
“Which if the due-diligence went well, includes a statement like, ‘In our opinion based on the review conducted, we did not find any material defects or risks that prevent the transaction.’ Show how you have come to this conclusion. In your detailed findings, lists your sources, cross-reference your documents, list who you spoke to and when you spoke to them be as factual as you can. As an aside, version control is key in writing the report. You might easily get up to version twenty. Like in any business setting, communication is key.”
Clear communications. We don’t let people give us open-ended questions. We keep drilling down. We need to know exactly what it is that you’re talking about. We can’t think that you’re talking about fruit. We have to know that you’re talking about oranges. That specific. I can’t know that you’re talking about fruit. We’re going to keep drilling down that you’re talking about oranges, then we’re going to know what kinds of oranges. From what region? We keep drilling down because we need very clear communications. Once the strategy is put together, you can’t undo it or we can’t go back to the management team and say, “They met this.” They can’t come back and say, “I met this, not that.” We got to be able to hold people clearly accountable for the information that they give us. That’s why a Solomon RC Ali Corporation is so important.
Go to our website and you’ll see some of this information where you’ll be able to begin to understand, especially some of the deals that we have done. Clear comumunication. I can’t know that you’re talking about fruit. I need to know it all the way down because I have to be able to hang my hat on, “Mary said this. This is when she said. This is how she said. This was the conversation. This is what I took from that conversation.” Once the reporting strategy is done and we’re sharing the strategy in the report, Mary can come back and say, “I didn’t mean that.” Mary’s going to have to hold her hand up and confess, “That’s what I said.” The same on the other end. If I don’t understand and I’m the one doing the investigation in the due diligence, the burden is on me to get the answers and get to the bottom of it.
If I’m talking to none of their humans, employees or management, I’m doing due diligence based on SEC filings, regulatory filings, it’s going to be a little harder to get clear communication. What you can do is compare that to other companies to see because there should be a common thread going right across one company to another, especially if they’re in the same industry. That’s how you’ll make sure that you’ve got clear communications because even if you read it and it’s in the filings, you don’t want to take it for granted. That’s exactly what they meant. You need to be 100% sure.
“Start of the day and end of the day are good ones with sufficient time in between to do your research and generate findings. Not only do you communicate back to the senior management of the acquiring company, you also need to keep your contacts at the target company updated on whatever you need to get the help you need and get the documents you need.”
Do you know what time 22:00 is? That’s 10:00 at night. That’s a long day. That means that person did a fourteen-hour day. This is not one day. This may go on for months. Sometimes doing that transaction with a business can take 6 months up to 1- to 1.5-year depending on the size of the business. People will be putting in these hours. To do due diligence is very expensive, to hire attorneys and accountants. Can you imagine some attorneys at $500 an hour working a fourteen-hour day? That’s a lot of money. It’s fast. You already at $7,500 every single day. Most of you cannot afford to be spending $7,500 per day. This is one part of the due diligence. It’s not the whole thing. They may be at that for months.Build on the expertise of the others that have gone before you. Click To Tweet
If you’re a business owner or an investor, that’s why you hire a Solomon RC Ali Corporation because my team and I get in there and do the same exact thing. We take it to our attorneys who are already on our clock. You’re not having to pay another attorney. We already have attorneys and accounts. We’re taking it to our people who are ready on our clock but we do all of that go for work so that when we turn it over to them, they may only have to spend a couple of hours on it so it brings the cost down considerably. A lot of times the attorneys appreciate that because someone else is doing all that grunt work even when they have paralegals. We’ll bring it to them. They’ll give it to their paralegals, they’ll oversee it and look at what now all the grunt work and everything’s been done.
If I was buying a company, it could cost me anywhere from $35,000 to $100,000 depending on the size of the company in doing due diligence. It’s a lot of money. I want you guys to keep that in mind so when you’re thinking about the importance of due diligence, how important it is, it’s extremely important. If you are an investor, you should be doing the due diligence yourself. If you’re a retail investor, investing in stocks or looking to get into stocks in its early stages, you should be doing the due diligence yourself or reaching out to a company like SolomonRCAli.info who goes out and does the due diligence, looking at management, financial history, putting models of that nature together to see how the company may perform in that particular industry and sector. Please keep that in mind.
Always Ask Questions And Mitigate The Risks
“Lots of people will want an update from the team on the progress. Don’t let this distract you too much from getting the work done. It’s good to agree on regular touchpoints with key stakeholders in the process. The start of the day and end of the day are good ones with sufficient time in between to do your research and generate findings. Not only do you communicate back to the senior management of the acquiring company, you also need to keep your context at the target company updated on whatever you need to get the help and documents you need and whether you have access to the persons you need to spoke to. How do make sure we get a full picture? What if the target company fails to disclose relevant information? It’s important to ask a significant number of open-ended questions. Things like, ‘What else should we be aware of regarding your services?’”
If I’m the buyer, I will require 25% held back in escrow for at least 1 to 2 years. No ifs and buts. If they have given me any wrong information, any information that we have missed, pending litigations that weren’t pending at the time but they knew about it, because sometimes people play a game. It’s not a lawsuit. It hasn’t been filed. They can say, “No. We don’t have pending litigation.” Where the truth of the matter is they may have received a letter about one coming down but they sold the company before it came down the pipe, now it’s my problem? No. I didn’t care. That’s why I would hold money back in the escrow to ensure things like that don’t happen. It could be that they failed to pay some taxes. If you got the money sitting there and escrow, you can go ahead and take care. It’s most common with payroll taxes and franchise taxes. Those are the two most common. You always want to make sure you hold some money back in escrow when you close the deal for those cases.
“‘Are there any concerns or open cases regarding the environmental health and safety?’ Questions like this emphasize the seller’s obligation to disclose. It’s advisable to withhold part of the total acquisition sum on the deal signing. That way, if any material items come up later that should have been disclosed during the due diligence process, you can withhold payment until the issue is resolved rather than having to look for compensation in court for information that was misleadingly withheld. There is a difference between the substantial risk in due diligence and an improvement opportunity.”
Visualize The Process
I’m going to try to give you the visualization. Before I close any transaction, I visualize that deal all the way through. The pros, cons, negatives and synergies. That’s why I’m pointing out. This company here might have a great marketing team. This company might have a lousy marketing team. We’re going to eliminate this. These are now becoming synergy. This company may have an excellent payroll administrator. These companies may have lost. I’m going to eliminate all the other payroll administrative people and we’re going to pile that right there. Same with marketing. All of these companies have marketing people. I’m going to eliminate the marketing of four and we may use the marketing at one. That means I’ll get rid of all the duplications. The idea of doing that is to be able to make more profit. I’d be remiss if I don’t say this. Most acquisitions fail because they can’t merge the cultures together. They don’t work and they end up having to be unwieldy, laid or sold off.
“He might be running some aspects of the business in a way that you disagree with but that does not necessarily mean that there’s a business risk. While working on the due diligence, visualize the post-closing situation. What does the combined company look like once the pieces of the puzzle are put together? You can also add value by helping to prioritize the integration priorities and risks. The final step of your due diligence project could be to provide a briefing and do a handover to the integration team. There you have it. Ten valuable due diligence tips. Take it seriously. Right size the team, put together a diverse team, confidentiality at all times. Good checklist and a good brainstorm.”
Let’s go through the ten. This is what they’re talking about. These were some valuable due diligence tips. When you’re doing due diligence, here’s what Solomon RC Ali says, “Pay attention to management.” Historically, you want to focus on that. Pay attention to the company, double- or triple-digit. Most other professionals are going to tell you double digits. What I’m going to tell you? You want to see triple-digit growth from that company. Third, the industry must be growing or have the ability to grow. It’s got to be on the upswing. The fourth thing that I like, management has to be putting money back into their business to scale their business to make it more profitable but to scale it to grow its revenue. Please keep that in mind. Those are the things that are going to bring you the returns. Those are the things that if you’re a CEO or a management team, that’s going to help you to be bankable. That’s going to help investors want to invest in your company.
The other thing is I’m always looking at who’s on your board of directors. Your board of directors should read a who’s who. You should have key people in there who know and understand your industry, how to run and operate a business. If you have a board of directors and I’m doing my due diligence and I say, “You pulled up your friend, mom or cousin from down the street.” Your business has no credibility at that point. If you want people to invest, do the right things. Do the work. I want to thank you so very much for reading.
It’s been fun and exciting. I look forward to the next episode and bringing you some more very valuable content. If you have any questions, please don’t hesitate to go to SolomonRCAli.info. My team is there to help you and work you through whether you’re an investor looking for a good investment and want to know how to do the due diligence. Remember, we’re not promoters, not market makers or broker-dealers, not trying to sell you on those stocks or ideas but we’re trying to educate everyone on how it’s done and why it’s done in the manner that it’s done so that you can be successful and have a better future for you and your family. Have a wonderful week.