How Does Due Diligence Work?
If you want to become a better buyer, then you should understand how due diligence works.
Due diligence is both a simple and vast subject. It is different for every buyer. In short, it is the process of researching a business to make sure it meets all the various criteria before spending your hard-earned cash on acquiring the asset.
Some buyers on our marketplace confuse vetting with due diligence. While there are some similarities, it is important to keep in mind that due diligence is very different from vetting.
When we talk about our vetting process, our team analyzes businesses to make sure they’re legitimate. We look through their profit and loss statements, their traffic analytics, and other key metrics to make sure the business is doing what the seller tells us it is doing to the best of its ability. The nice thing about the vetting process is that it makes our marketplace a curated marketplace.
That means you’ll only ever see legitimate businesses making a positive net profit cash flow every single month. You’ll never have to worry about if a business is truly producing revenue unlike other marketplaces or if you went the private sale route.
Due Diligence Frameworks: Why They’re All Different
A due diligence framework is a tool that you must develop as a buyer.
It is a series of checklists and criteria that a business must meet in order for you to acquire the business. This tool is useful when it comes to speeding up your actual acquisition process. Most experienced buyers will have a due diligence framework that has multiple levels to it.
The first level is to weed out 99% of the bad opportunities for them. They use this 5-minute check to disqualify businesses as fast as they can so they can move on to the ones that really make sense for what they’re doing. Their next level will take a closer look at the remaining businesses with the same goal of eliminating bad fit businesses. The final level is likely where they actually get on the phone with the seller to talk in depth about the more intimate details of the business.
Every due diligence framework is different from buyer to buyer because each buyer has slightly to vastly different goals.
One buyer might be looking for nearly perfect businesses that they can just maintain. Another buyer might be looking to pursue aggressive growth and for brands with potential for expansion. A buyer might shy away from a site that has a Google penalty, while another buyer has Google penalized sites as a crucial element to their framework because they’re masters at reversing penalties, which allows them to acquire “undervalued” businesses for their portfolio.
It all depends on who you are, what your business goals are, and what your current skill sets and team capacity are.
If you’re new to this concept, we actually can help you walk through the process.
Our team of business analysts provide a free criteria call that can help you define your goals and furthermore define your due diligence framework. Once you have developed a sound framework, we can then help you find the business that matches your framework as close as possible.
Avoid this Framework Mistake
A common mistake that new buyers make is creating a due diligence framework that is too specific.
If you create a framework where you need to be in a certain niche, selling a specific product, at a defined price point with this kind of monetization….
You’re never going to find it.
Well, you might, but it is going to take forever, and the opportunity cost is going to be large. Typically, it is wiser to set a more broad framework that allows you to be flexible on what kind of asset helps you move forward with your goals.
If you’re ready to get the process started, then simply click the link below.