Understanding Due Diligence with Brian Diener from Centurica

Understanding Due Diligence with Brian Diener from Centurica

Brian Diener is the Director of Operations at Centurica. He has worked on over $50 million dollars in deals with buyers and sellers. Strong knowledge of Analytics, paid search and is a search engine optimization specialist. Experience operating and managing a portfolio of eCommerce and content websites.

“The goal of Due Diligence is to verify all of the information that has been presented. The offers that a buyer has made on a business is based on what has been claimed. During due diligence, the aim is to verify all of that information”.

In Brain’s talk, you will hear about what to expect as a Seller and he will walk you through a sample Due Diligence process.

Due Diligence takes place after the LOI has been signed by the Buyer and right up to the time of closing. This timeline can range from 1 – 2 weeks on the shorter side right up to 6 – 8 months on longer deals.

What is the purpose of Due Diligence?

  1. Verify Claims
  2. Identify Potential Risks
  3. Assess Opportunity

What’s involved in Diligence?

Typically it is broken down into a few key stages:

  1. Kickoff / Requests
  2. Financial Verification
  3. Operations Review
  4. Sales/Marketing Assessment
  5. Transition Planning
  6. Growth Plan
  7. Closing

There will be a lot of people involved in the process and it’s critical to keep it organized and start with a call between the buyer and seller. This sets the right expectations going forward.

“One thing that kills due diligence is when a buyer is send over an email every three hours. Keeping it all organized will ensure you don’t miss anything and move through the steps in a methodical process”

Key Tasks

  1. Confirm P&L data
  2. Show key financial trends
  3. Explain operations by task and role
  4. Breakdown key sales and marketing channels

What tools are used for Due Diligence?

There are hundreds of tools out there to help perform due diligence. Here is a link to a list of 60 tools that Centurica use for all of their DD clients.

Further to this, it’s really important to realise that there are still human interactions, people selling and people buying. A lot of times (more often than not) the potential buyer has not even purchased the product from the company. Often they have never been to the website and signed up for the email newsletter, talked to customer support, interviewed any of the employees. Tools are critical, but the human side of due diligence is more valuable than any tool.

Here is a link to a list of 60 tools that Centurica use for all of their DD clients. It’s really important to realise that there are still human interactions, people selling and people buying. A lot of times (more often than not) the potential buyer has not even purchased the product from the company. Often they have never been to the website and signed up for the email newsletter, talked to customer support, interviewed any of the employees. Tools are critical, but the human side of due diligence is more valuable than any tool.

Top 5 Due Diligence Issues

It is very rare that you get through a diligence process where no issues have come up. If nothing has come up, the due diligence process most likely has not been digging deep enough. All small businesses have issues that are potential risks. Here are the top 5 issues Centurica see when

1. Lack of bookkeeping/accounting

There are so many million dollar businesses that don’t use any accounting software. Xero does a fantastic job of this. Categorisation and verifiable transaction items is super important. If you have more than business make sure they are not commingled and it’s clear. Keep things clean for each business makes the sales process much easier. If you can hire a bookkeeper and let the experts take care of it.

2. Undisclosed violations or warnings

A lot if not most businesses have issues. This is ok. The issue arises when you are not forthcoming and do not talk about it with the buyer. If you get three weeks into the dd process and the buyer uncovers an issue, the buyer will start wondering what else you have haven’t told them about. Make sure people are aware of these issues so the deal doesn’t fall over at the 11th hour.

3. Transferability Issues

Some accounts with supplies can be difficult to transfer so make sure you have this in order being going to market.

4. Legal / tax issues

Make sure there are no outstanding tax issues that will roll over to the new owner. Work through this with the seller. Ensure taxes are registered and properly collecting taxes where you should be. Always check for trademarks. Some factories overseas have started to trademark American brand names and register a trademark overseas in China. If you are selling and you are an established brand Centric recommend doing a search overseas and registering trademarks in Europe and anywhere else you think you might trade in the future.

5. Loss of trust

This is the most common due diligence issue. All of this can be resolved by being upfront and transparent with the buyer. As soon as this is gone, it is the number one deal killer. You very rarely recover from this.

Due Diligence Tips

  1. Let someone else represent your interest
  2. Maintain open communication and transparency
  3. Prepare for potential issues and questions
  4. Share both positive and negative experiences
  5. Provide operational guidance and support

Resources

For a more indepth checklist vist this post 
Brain’s tools list
Ecommerce Crew Podcast 274 How Due Diligence Helps Sell Your Business

How to Complete Due Diligence When Purchasing an Online Business

How to Complete Due Diligence When Purchasing an Online Business

For every online giant like Amazon, there are several smaller online startups that have the potential to grow into a large multinational corporation. Unfortunately, the vast majority of these startups will end up being abandoned or failing before they reach their true potential. 

A common reason why these failures happen is that the owner is unable to dedicate the time and energy it takes to grow an online business. So even if the creator of an online business has a great product or service idea and has developed effective business tactics to help get results, they might still end up selling their company simply because it becomes too much for them to handle. 

This is the perfect chance for another entrepreneur to swoop in and purchase the online business for a low price. However, before they start putting in any offers, they first need to ensure that the business is worth it. Here is how someone can complete the due diligence steps that should be completed when purchasing any online business.

Look at the Books

Financial due diligence is a huge part of any business deal, especially when it comes to purchasing an entire business. One of the biggest components of financial due diligence is looking through the accounting books. This is done to ensure that there is nothing troubling or out of the ordinary. 

There are a lot of potential red flags that could be located in the books. One of the main things they are looking for is trends or patterns in the records of revenue and profits. Ideally, the online business should demonstrate that they have been steadily climbing in both revenue and profits recently. It is even better if they have been doing so since they first started. 

Some minor drops in revenue are fine because this is their trial and error phase at the start. However, it is a bad sign if they have not achieved steadily rising profits in the last few months. If a business does not have a model that allows them to get sustainable revenue and profits, then it could be that the whole thing is a house of cards that only needs one big shake-up to come along and completely ruin the business. 

Another thing that should be looked at is the source of the company’s revenue. If it is all being directly achieved through one main product or source, then this is not good. 

A business with only one single source of revenue is far more likely to experience major periods of financial hardship. However, if a company has diversified itself and achieved many sources of revenue, then, even if one of them ends up failing, they should still be fine by supplementing their profits from the other sources. 

Check the State of Any Licenses

Many online companies obtain licenses for various products or other assets that only last for a certain amount of time. Therefore, it is important for the potential buyer to look at the company’s various licensing agreements. If they are temporarily licensing the rights to a certain trademarked item and this license is about to expire in a couple of months, then they need to ensure that the cost to renew it or the consequences of it expiring will not greatly affect the value of the business. 

Confirm Ownership of Assets

Depending on the specifics of an online business, they could potentially have many different assets associated with their company. However, not all of the assets that they possess could actually be owned by the business itself. 

For example, having any leased or loaned equipment or property will result in their worth being valued at far less. Therefore, it is important for entrepreneurs to take the time and look through asset ownership to confirm that the business fully owns any and all of their assets before committing to purchasing the online business.

Completing all of this due diligence will ensure you don’t get stuck with a lemon. To get started on finding the perfect online business to purchase, visit Flippa today.