If you are looking to acquire or invest in a business, you already know that you need an experienced service provider to help you with due diligence. Knowing whether someone is a right fit is not always an easy task. In this article, we provide a helpful list of questions you can ask when interviewing or screening your due diligence service provider.
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The opportunity to buy or invest in a business can be both exciting and terrifying. You may be up nights, thinking about all the income this business could generate for you. It seems like such a great setup!
But savvy buyers know that could all be smoke and mirrors. How will you find out? You might be losing sleep worrying about all of the research you need to do to understand the business model, or all the legal and financial details you need handled.
The solution to your worries is to hire highly qualified due diligence professionals who specialize in each aspect of the process, from vetting a business to creating the sale contract. Ideally, you wanted pre-screened professionals with a solid track record.
You probably know you need experienced people to help you with due diligence for a company purchase–but maybe you’re wondering how you’ll know if someone is the right professional for your situation.
How can you choose the right due-diligence pro? Below is a list of ten important questions to ask, when you interview due diligence providers of any type:
1. Have You Done Due Diligence In This Industry?
Each industry operates in its own way. Vetting a light-manufacturing business requires completely different knowledge than you’d want for an ecommerce business. It’s important that your due-diligence professionals have experience in the specific industry where you’re looking to buy or invest. They need to know how to do due diligence on a company of this particular type.
Businesses operate in different ways. Your industry might be heavily regulated or completely unregulated, for instance. The technology used in this field might be arcane and complex. The business could have thousands of small customers, or rely on a handful of major customers with contracts that could expire soon.
Worse yet, maybe the industry is struggling overall. You don’t want to wake up after the sale and realize you’ve bought the next Blockbuster video!
Without an industry expert, you don’t know what you don’t know. You don’t even know the right questions to ask, to spot every possible sign of trouble in the business–or of future opportunity.
An expert might have helped buyers purchase other business types, but without specific knowledge of yours, it’s not a good match.
2. How Long Have You Provided Due Diligence Services?
When you’re paying for expertise, you want a lot of it. You don’t want a provider who’s just hung out their shingle as an attorney, is a freshly minted CPA, or recently decided to dabble in industry consulting.
Ideally, you want to hire a due diligence professional with many years of relevant experience. .
3. How Many Projects Have You Successfully Completed?
It’s one thing for someone to say they’re an experienced due-diligence pro. But the true test of whether a provider’s insights are valuable is if they help get deals done. Many of them. Each deal has its own twists, so the more deals they’ve done, the more they know and the better they can serve you.
Your professional should have due-diligence examples they can discuss, with details including type of project, length of the due-diligence process, and how their role contributed to a successful conclusion.
There are plenty of people who dabble in due diligence as a sideline to their primary work. They may only have worked on a few purchase/investment deals, over a long timeframe. That means they won’t have developed reliable procedures, checklists, and systems that ensure all the vital questions get asked at each stage of the due diligence process.
4. Are You Experienced With Transactions of My Size?
As with so many other things in life, size matters when it comes to business sale and investment deals. If your ‘expert’ has only worked on $1 million deals, they’ll be in over their head on your eight-figure purchase. Far more due diligence is needed for ownership to change hands on a $20 million business than for an under-$1 million business sale.
The problem also happens if the reverse is true. If most of your expert’s work has been for major M&A deals, their pricing may be high for a buyer who needs help with a $1 million purchase. They’re used to digging deep, and their routine procedures may rack up a massive bill, while doing tasks that aren’t really needed in your situation.
5. Can You Name Some Common Issues You’ve Discovered During Due Diligence?
Here’s where you really test out this person’s due-diligence savvy. The point of hiring due-diligence pros is for them to take a close look at what the seller has disclosed about their business–and poke holes in their story. They should be double-checking everything, trying to verify the buyer’s claims, to see if there’s anything fishy. The seller’s job is to dress up their business and make it look as attractive as possible–and your due-diligence person’s job is to sort out the reality from the spin.
If a due-diligence professional can’t immediately name a few problems they’ve uncovered in their company research, that’s a warning sign. You want pros who’ve done this enough to know the tricks sellers may use to make their business appear more successful than it really is.
This is really the point of hiring due-diligence help – to test their numbers, talk to their customers, challenge the projections, read key-employee contracts, and see what potential problems the buyer may be hoping you’ll overlook. If this professional has never found a problem, they don’t look hard enough.
6. How Did You Address the Problems You Found?
This follow-on question digs deeper into the professionals’ skills. Once problems are discovered, you want someone who can keep the deal from blowing up and find a compromise. They need some people skills to manage a delicate situation.
Listen closely to their stories about how they worked through problems, to see how creative they are about finding resolution and getting the deal done. Did they successfully negotiate a new clause in the contract to protect the buyer’s rights if key employees depart sooner than promised? Get the buyer to agree to re-value the business based on their lower revenue calculations?
They should know how to take practical steps to smooth out any wrinkles that appear once the seller’s business comes under close review by your team.
7. How Will We Communicate and Track Progress?
It may seem like a small point to talk about digital tools and communication styles. But in fact, clear communication is critical during the purchase process. You’ll likely have your adrenaline pumping and want frequent updates to track your deal’s progress.
Ask about both the frequency and the methods your professional wants to use. If they plan to send a weekly email, but you’d like to chat 24/7 on Slack, you may have a working-style mismatch that’ll create anxiety during an already-stressful time.
When it comes to their research process, true professionals will use a comprehensive due-diligence platform. If their research is scattered between Google documents, Excel spreadsheets, a task lineup in Asana, and discussions in BaseCamp, it may be harder for you to follow the vetting progress and make sure tasks stay on track.
Disorganized digital systems are also a sign that a professional isn’t very client focused. A diverse set of tools may work for them, but doesn’t help clients stay on top of the action.
This process can take weeks or months. Clarity on communication and reporting tools will give you more peace of mind as you go through the due-diligence process.
8. May I Speak With Your Past Clients?
Not every due-diligence professional will be able to do this, due to confidentiality agreements, but it’s worth asking. Anyone can say they’re a great due-diligence professional–but if they truly are, they’ll have happy past clients. Ideally, you want to talk to them.
The best-case scenario is to get referrals to former clients whose situations were similar to yours. For instance, if you’re taking an investor stake in a startup, you’d like to talk to other investors they’ve worked with. A buyer of a similar-size business or in the same industry as your purchase would also be highly desirable.
9. What Professional Credentials Do You Have?
Depending on the type of due-diligence pro you’re hiring, this question may be of more or less importance.
With an attorney or CPA, for instance, you’d like to see that they’re staying on top of new developments in their field. Beyond their legal or accounting degree, does the due diligence professional continue to build upon their knowledge by taking regular classes and workshops? Best practices in due diligence evolve over time, so look for someone who takes this specialty seriously and keeps up with the changes.
On the other hand, an industry expert’s knowledge may have been acquired more informally. They may simply have spent their career in the industry, or have bought and run several companies.
Remember that anyone can say they’ll help you buy a company – for a fee. Think about what qualifications you’d like to see in your pro, and ask about them.
10. How’s Our Rapport?
This isn’t really a question you’d ask your professional. Instead, it’s one you should ask yourself, after your interview conversation.
Did this professional put you at ease? Did they seem trustworthy and reliable? Did you relate well on a personal level?
You’ll be going through a stressful process together, where you’ll be counting on this person to represent your interests. Think a bit about whether you feel comfortable going on this journey with this particular person.
Ask Questions Before Hiring a Due Diligence Expert
In the heat of spotting an attractive business-purchase opportunity, it’s easy to grab the first due-diligence professional you hear about – or use your best friend’s uncle who’s an attorney or CPA.
Instead, look for a professional who’s the best fit for your particular situation. You’ll get better expertise and have a more pleasant journey through due diligence, with better odds of a positive outcome.