Once again I engaged Centurica to help me with the diligence. After the fraud the discovered last time (what I call overstating revenue by 22%), I wasn’t taking any chances. The service cost a bit more this time (3 sites) but still very reasonable.
Before I get into the diligence process, a word on spending money. In a previous life, I was a highly paid management consultant and dug through financial statements, sales reports, etc.. A few people I know asked me why I would spend money on paying someone else to do the work when I could have done it myself. It’s pretty simple.
Centurica does internet business analysis for a living and they see scams everyday. They can do a quicker and more thorough job than I would be able to do. This enables me to move faster. I can also focus on different types of analysis (sales, cost cutting, etc..) that will tell me the opportunities and risks of the business. Additionally, investing a little bit of money here could save me a lot more if they discover revenue discrepancies like in the Golf Cart business.
Back to diligence. There were three main components in my diligence process:
- Revenue verification and website analysis: Ensure the the revenue is accurate and that there are no boogeymen hiding with how the website is marketed.
- Business analysis: Understand sales, costs, employee roles, suppliers, etc…
- Seller assessment: How do I feel about the seller? Is he solid, a scam artist, difficult, easy to deal with, etc… I only want to do a deal with someone I can trust.
Revenue Verification: This was covered by Centurica. They took about a week to perform the diligence and got back to me with no real surprises. Revenues were spot on, the expenses seemed in line with what they should be, and the link profiles were exactly what was disclosed to me (they weren’t perfect and recovering from a penalty). All Clear.
Business Analysis: This is something I can do. Business is business and for most of this you don’t need to understand the space the business is in. Anything I didn’t understand, I could easily find a resource. Again, no surprises. No single product or supplier represented a significant share of revenue, all the costs matched the p&l, and sales matched the revenues which matched Google Analytics. One word of advice is to always triangulate something like sales. What I mean is that even though Centurica verified through authorize.net, I looked at 3 other pieces of data to verify. Someone may fudge 1 piece, but fudging 3 and having it all sync up is pretty hard without setting off a red flag. All Clear.
Seller Assessment: This is more art than science. Some of you may say “Who cares if he/ she is difficult to deal with or you don’t like them. Why does it matter?”. The reason I care is that I am spending a lot of money for a business that I was able to do diligence on for 30 days. I have no idea where the dead bodies are and the more difficult someone is, I always feel like they are trying to hide something. Yes you can sue after the fact but that’s really expensive and usually not worth it. So, I spent hours on the phone with the seller talking business and life. “Why is he selling? Why is he selling now and to me? Tell me about your employees? ” You can learn a lot about people this way and I highly recommend it for a large sale. All in all, he is a solid guy just looking to go to the next thing (12 years ownership). All Clear.
At this point I was pretty comfortable with what I had seen and was ready to move to the next stage which is drawing up the APA. I engaged my lawyer, gave him the LOI, and let him get to work. One of the first pieces of advice he gave me was that I needed to put a holdback provision in the APA to handle contingencies unknown and it is fairly standard. Hmmm…. hadn’t thought of that. This means I needed to re-trade. Not the biggest of deals but something to deal with and should have been done in the LOI. It was a rookie mistake but it is what it is.
This is where the positive working relationship I had built up with both the broker and the seller came into play. It’s also important to remember that I paid a fair price for the business and up to this point there was no BS for either of us. IMHO no BS worth its weight in gold. I proposed the holdback, everyone understood and said we can talk about it further in the APA discussions. Truthfully, I think the broker was surprised it wasn’t in the original agreement since it was an all cash deal (no seller financing). Again, easy seller to work with = constructive discussion with a positive outcome.
Now it was time to start dealing with the banks…..Here is my post on that.