Whether you are investing with a partner to build your property portfolio, investing with a company to get a good return on your money or looking to acquire or invest in a company, conducting good due diligence is key to reducing risk. Due diligence is used to investigate and evaluate a business opportunity. The aim is to confirm that the opportunity is what it appears to be, identify potential defects to avoid a bad business transaction and gain further information to value the opportunity before proceeding. The following are a few tips to ensure your due diligence is thorough and proper.
“Winning can be defined as the science of being totally prepared” – George Allen
Tip 1: Define Purpose
First things first, you need to be clear about why you are looking into the opportunity and where the value of the opportunity lies. If you are looking for hands-free investment and the opportunity required you to be an active member then you are looking at the wrong opportunity. Be sure you have this defined and that you are not looking at an opportunity purely because it arose. You should also define your level of risk and what would make you walk away from the opportunity.
Tip 2: Structured Approach
When looking to invest in a business there are three areas to focus on; the trend in the business’ financial results; the outlook for demand and competition; and what has and will make the business competitive in the long term. These three areas can be broadly used when assessing other investments and not just when acquiring businesses; trend, demand and success features.
Tip 3: Quality Over Quantity
Now you know the answers you need to make a decision, you must ask the right questions. The key to due diligence is not to shy away from asking questions in order to get a true picture of the opportunity. When information and answers are received your focus should be on the quality of the information provided, not the quantity. The quality of the financial information is vital so ensure you receive well evidenced forecasts with no missing data.
This just touches on the subject of due diligence covering the approach you should have for gathering the correct information. Meeting with the business/opportunity owners and knowing the values they hold will also be of importance. You should not stop your due diligence until you have a firm answer on whether you wish to invest or not.
For larger acquisitions of companies you can hire specific companies to conduct the due diligence for your or the broker selling the company may have already prepared this for your review. But again ensure your mind is clear and that you are happy with the level of remaining risk before you proceed.
We hope you have found these tips useful and are able to use them to improve your business and investments. Don’t miss out on future tips - subscribe to Turner Invest newsletter on turnerinvest.co.uk and follow us on social media.
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