Let me share some ideas on when to do due diligence:
Trying a new idea.
With any new idea you should do your research and find out a reasonable amount about that particular thing. Let’s say you are considering setup of a website. Firstly research some of your questions. The answers are almost always on Google. In other words, learn a little on the subject and know a little about it, so that when you start talking with suppliers (and you should always get 2-3 quotes on anything of this sort of pricing) you firstly know the questions to ask, and then know if anyone is trying to “pull the wool over your eyes”.
Check out new suppliers.
Before you start working with anyone, check them out. Do they have great testimonials, or references? Do they have lots of endorsements? Are there any negative posts online about them? Do they have a high Google Ranking or other type of review? If you are looking for accommodation, then a site like Trip Advisor is exceptional. Remember this: If 95% of ratings are great, then don’t put any weight on the one whinge in there – we all know you can’t please all the people all the time. However, if it’s the other way around and most people say the rooms are cold, stinky, have bed lice and walls as thin as paper, with just one person saying how absolutely wonderful the rooms are … then perhaps that one person is the owner, friend, manager or employee of the establishment.
Networking or Recommendations.
Someone may recommend someone to you. If you know the person recommending really well, trust them AND they have said they have used the person, then you possibly need to do less. However, ask them a question like “have you had any negative experience, however small, with them?” or ask a specific question which is important to you, like “how quickly does he respond to emails?”. Of course, as with any new supplier, ask questions around service and pricing. Your recommender’s idea of “reasonably priced” may not be yours so do ask questions.
Leases, Contracts & Franchise Arrangements.
In these cases, quite often the deal is hugely substantial. Buying a business, or signing a 5 year lease is big and you need to go into this arrangement with complete due diligence being done. Due diligence will expand beyond simply Googling them (but do that too) and beyond reading the contract. Get a solicitor to review the documents and explain anything you don’t understand to you. Some people say legal advice is expensive, but think about what it could cost you if you don’t get advice? It might be more than the actual purchase price … you could end up losing your home, or going bankrupt … to me that fee is effectively cheap.
Your Business Figures.
How often do business owners quiz their accountants and bookkeepers about the business figures? Not always. They feel uncomfortable asking as they feel they are challenging that person, but every business owner should know and understand their figures. If you don’t know where money is going – ask! If you don’t know what a line item on your Balance Sheet is – ask? If you don’t know what a Balance Sheet is – ask (or research and learn). Ask why certain figures are higher than you’d expect, or others are surprisingly low. No advisor or bookkeeper should fob you off or make you feel stupid asking – and if they do, perhaps it’s time for a change!
Making a smart decision is about being informed. Do your research, due diligence and investigation BEFORE you go into anything, so that you are making an informed decision. Don’t scrimp on time with this, though I would not spend an hour researching paper clips, but an hour researching a prospective business buy is no-where near enough.
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