Due Diligence you should be looking forward not backwards

The Goodwill in a business is the future profits of that business, in other words a buyer is buying next years profits.

However, buyers when they carry out due diligence do not understand this fact. They spend time and money verifying the past turnover and historic performance of the business and ask their accountant to look at the latest accounts in detail.

This is important but historic results are no guarantee that a buyer will be successful.

What is often seriously lacking in the due diligence process is an investigation of whether the buyers plans for the business will work.

You see it time and again when new businesses open, they open the doors trade for a little while and then close down. Or a business owner buys a business tries to change that business but fails.

So when you are looking to buy a business perhaps your due diligence should not be aimed so much at proving that the seller is not telling the truth about his profit, but on ensuring that you as a future owner can increase that profit and that you can increase the value of the business.

This entry was posted on 04/08/2010 at 10:26 am and is filed under Buyers, General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.