“You saved us from a potentially terrible deal.”
Those were the exact words a client said to us recently. These words are a good reminder of why you need to invest in Due Diligence before moving forward with an acquisition. Here’s what happened.
The (Seemingly) Attractive eCommerce Shopify Business
This client initially contacted us to help them review an online business they were looking to acquire. They mainly wanted help on the financial side of things, but they were also looking for our expertise on the traffic and website characteristics as well. This was an Australian based business, Shopify being the only sales channel.
During the Due Diligence process, we identified some key weaknesses and issues that were instant red flags for our experts.
The first issue was that the financial information was inaccurate. The financial analysts identified journal entries in the company records that were increasing revenues fictitiously. The Seller could not explain this, and they actually changed the explanation a couple of times during the DD process (another red flag).
All explanations were absurd according to our experienced analysts. Fortunately, we kept an open communication channel with our client during the whole process to make sure they weren’t fooled by Seller.
The second issue concerned the website, the only sales channel. Our analysts identified potential signs of plagiarism. There was another website, based in the US, from a completely different owner that was almost exactly the same website. However, the US website was built before the Australian one. Sound fishy, right?
The mission of each website was the same, the products sold were the same, and both sites used the exact same pictures. Our client, the potential Buyer, was considering this acquisition to expand the business to the US. Therefore, this was not only plagiarism, but it was also the end to the growth plans that were under consideration.
The Seller tried to twist the opinion of our analysts by saying that they were very experienced in e-commerce businesses with successful sales in the past. Stuff like this happens all the time. An inexperienced buyer could be deceived by these apparently successful Sellers and trust without checking for real evidence.
Don’t Take The Seller’s Word
Many times, Buyers only pay an advisor to comment on the Seller’s financials. At Centurica, we don’t trust the Seller’s financials based on their word alone. We rebuild the financials ourselves. We review the e-commerce platforms by getting live access to them, we review bank and credit card statements to calculate and validate the operating expenses.
We do a deep dive of the Supply Chain process. We recalculate the landing costs by checking invoices. We verify the freight and duties charges by comparing them with market rates. We get inside the financial records and verify the journal entries, the accounting methodology and raise any inconsistencies to our client.
Due Diligence Is An Investment, Not An Expense
It’s important to note that Due Diligence fees are not an expense. They are an investment, a key investment to start your business. It will confirm you that you are buying a healthy business or it will prevent you from moving forward on a terrible deal.
It will give you the foundation of your business plan post-acquisition: how to manage your marketing spend, the level of inventory required, the pricing policy that fits the business, the enhancements required in the website. But first of all, it will give you a clear starting point from a financial perspective.
Not conducting a proper Due Diligence before acquiting a business would be like exploring an unknown country without any local currency or a GPS. You’re in for an adventure, but not the fun kind that you want.
When you have doubts about hiring us (or anyone of that matter) to run a Due Diligence for you, just remember these words…’You saved us from a potentially terrible deal.’