13 Concepts We Can Learn About Due Diligence From How2Exit's Interview W/ Ahmed Raza - Watch Here
Here is what my team and I learned from this interview: (These are notes from team members, writers, sometimes AI, and even listeners who submitted what i learned loosely edited and shared here) - If it seems a bit unrefined, you're reading our notes, so. yeah. -Ron
Concept 1: Rapid Diligence Helps Buy Businesses
Rapid Diligence is a company that specializes in helping people buy small businesses, mostly online, but they have also worked with traditional businesses as well. Founded by Ahmed Raza, who has a background in acquisition entrepreneurship, Rapid Diligence primarily helps with the buy-side diligence process. This means that they come in and help buyers make sure everything looks good from a financial, operational, and technical perspective.
The company's focus is on what they do well, and they make sure to refer clients out to attorneys for legal due diligence and other professionals for cultural and other types of due diligence. This approach allows them to build a diverse network of professionals while keeping their focus on their core expertise.
Rapid Diligence has a track record of success in buying, growing, and exiting e-commerce businesses. Raza's first few acquisitions were distressed and neglected assets, which he grew and exited. As he started going for larger businesses, especially with the private equity fund or with investor capital, he went after more established businesses.
Rapid Diligence's services are especially useful for those who are in the search phase and are still looking for a business or have something under L.O.I. or contract. They help buyers make sure everything looks good from a financial, operational, and technical perspective. This is crucial because buying a business is a significant investment, and due diligence is crucial to ensure that the investment is sound.
In conclusion, Rapid Diligence helps buy businesses by providing buy-side diligence services. They help buyers make sure everything looks good from a financial, operational, and technical perspective. Their services are especially useful for those who are in the search phase and are still looking for a business or have something under L.O.I. or contract. With a track record of success in buying, growing, and exiting e-commerce businesses, Rapid Diligence is a company that buyers can trust to help them make informed decisions about their investments.
Concept 2: Due Diligence For Online Assets
The world of online assets can be a tricky one to navigate, with many potential pitfalls and risks. Due diligence is a crucial part of the process of buying an online asset, and it is important to ensure that everything is in order before making a purchase. Rapid Diligence is a company that specializes in providing buy-side diligence services for those looking to buy online businesses.
The process of due diligence involves taking a close look at the financial, operational, and technical aspects of the business in question. This can include things like analyzing financial statements, reviewing contracts and agreements, and examining the technical infrastructure of the business. By conducting a thorough analysis of these areas, buyers can gain a better understanding of the risks and opportunities associated with the business and make more informed decisions about their investments.
One of the key benefits of working with a company like Rapid Diligence is that they have a track record of success in buying, growing, and exiting e-commerce businesses. This means that they have a deep understanding of the industry and can provide valuable insights and advice to buyers. They also have a team of experienced professionals who are skilled at conducting due diligence and can help buyers navigate the complex process of buying an online asset.
Another benefit of working with Rapid Diligence is that they offer a range of services that are tailored to the needs of different buyers. For example, they offer a start-to-finish plan that is targeted towards first-time buyers and provides comprehensive buy-side advisory services. They also offer due diligence services for those who are already under L.O.I. or contract and need help with the due diligence process.
In conclusion, due diligence is a crucial part of the process of buying an online asset, and Rapid Diligence is a company that specializes in providing buy-side diligence services. By working with Rapid Diligence, buyers can gain a better understanding of the risks and opportunities associated with a business and make more informed decisions about their investments. With a track record of success in the industry and a team of experienced professionals, Rapid Diligence is a company that buyers can trust to help them navigate the complex world of online assets.
Concept 3: Small Businesses Often Lack Financials
However, one of the challenges that Rapid Diligence faces when working with small businesses is the lack of financial records. Many small business owners do not have a background in finance and may not have the resources to hire a full-time accountant. As a result, they may not keep detailed financial records, which can make it difficult for buyers to assess the financial health of the business.
In some cases, small business owners may only have a business bank account and a tax accountant to help them manage their finances. This can make it challenging for buyers to obtain the necessary financial statements, such as income statements and balance sheets, to conduct a thorough analysis of the business.
Despite these challenges, Rapid Diligence has a team of experienced CPAs who can help buyers review financial records and make informed decisions about their investments. The company also takes a comprehensive approach to due diligence, looking at factors such as website traffic, operational risks, and opportunities for growth.
In conclusion, while small businesses may lack financial records, companies like Rapid Diligence can provide valuable support to buyers looking to invest in online assets. By leveraging their expertise and experience, buyers can gain a better understanding of the risks and opportunities associated with a business and make informed decisions about their investments.
Concept 4: Financials Can Be Deceiving
The podcast discusses the challenges that arise when buying small businesses, particularly those with sub-$5 million valuations. The hosts note that many small business owners do not start their companies with the intention of selling them, which means that their financial records may not be as organized as they could be. This lack of financial clarity can make it difficult for potential buyers to assess the value of a business and make informed investment decisions.
The hosts also note that brokers can add an additional layer of complexity to the buying process. While brokers may present businesses with cleaner financial records, they may also inflate earnings through ad backs that are not necessarily justified. This can make it difficult for buyers to accurately assess the true value of a business.
Despite these challenges, the podcast suggests that it is still possible to invest in small businesses with sub-$5 million valuations. By working with companies like Rapid Diligence, buyers can gain a better understanding of the risks and opportunities associated with a business. Rapid Diligence can help buyers navigate complex financial records and identify any red flags that may indicate potential problems with a business.
In conclusion, the podcast highlights the importance of being cautious when investing in small businesses. Financial records can be deceiving, and it is essential to conduct thorough due diligence before making any investment decisions. By working with experienced professionals and taking a careful approach to investing, buyers can minimize their risks and maximize their returns.
Concept 5: Add Backs Are Subjective
One of the key takeaways from the podcast is that ad backs are subjective. Ad backs refer to expenses that are added back to the business's profits to make it appear more profitable than it actually is. While some ad backs are straightforward, such as personal health insurance costs, others can be more difficult to navigate.
For example, some brokers may add back the cost of content creation, arguing that the content is already out there and will continue to provide results without additional investment. However, this can be a tricky area, as ongoing content creation is necessary for the business to remain relevant and competitive. Ultimately, ad backs become a matter of negotiation, and there are no clear guidelines or industry norms to follow.
Another challenge with ad backs is that brokers may be motivated to get the highest price possible for the business, leading them to add back expenses that another broker wouldn't. This can result in a buyer overpaying for a business that is worth far less than the listed price.
It's important for buyers to conduct thorough due diligence when investing in small businesses. This includes carefully reviewing financial records and working with experienced professionals who can help navigate the complexities of ad backs. It's also important to be cautious and not rush into any investment decisions without fully understanding the risks involved.
In conclusion, ad backs are subjective, and buyers need to be careful when evaluating the profitability of a small business. By working with experienced professionals and taking a careful approach to investing, buyers can minimize their risks and maximize their returns.
Concept 6: Check For Undisclosed Roles/Salaries
The podcast discusses the importance of checking for undisclosed roles and salaries when evaluating small businesses for investment. The speakers highlight the common scenario where business owners do not pay themselves or their partners a salary and instead take dividends. This can lead to a skewed perception of the business's profitability and can cause problems for potential buyers who may not realize the need for additional employees to fill these roles.
The speakers emphasize the importance of negotiating a nominal salary for these undisclosed roles before evaluating the business's profitability. They also stress the need to look at the normal roles inside the business and figure out who is doing them and how they are compensated. This includes looking at content businesses and who the writers are, as well as who is responsible for project planning and reaching out to content producers.
During due diligence, the speakers recommend asking for an org chart and looking for red flags such as no one being responsible for writing code or pushing up code for a SaaS software business. They note that focusing on specific categories of businesses, such as e-commerce, SaaS, and content, makes it easier to evaluate the key responsibilities and roles needed for the business to run successfully.
In conclusion, the podcast emphasizes the need for buyers to be careful when evaluating the profitability of a small business. It is essential to work with experienced professionals and take a careful approach to investing to minimize risks and maximize returns. Checking for undisclosed roles and salaries is an important step in this process and can help buyers make informed decisions about the businesses they are considering investing in.
Concept 7: Dig Deep Into Org Charts
One of the key takeaways from the podcast is the importance of digging deep into org charts when evaluating a small business. The speaker notes that it can be challenging to understand all the responsibilities and people behind a business, making it difficult to discern what might be missing. However, by looking at org charts and asking questions, buyers can gain a better understanding of the business and identify any critical functions that may not be disclosed.
The speaker emphasizes that this is particularly important for businesses in the e-commerce space, where inventory storage and shipping are critical functions. If these roles are not being disclosed, it could be a sign that something is amiss. The same is true for content creation and search engine optimization in the online space. By understanding who is responsible for these functions, buyers can get a better sense of the business's profitability and potential for growth.
The podcast also highlights the need to look for the unsaid when evaluating a business. This means looking beyond the surface-level information and asking questions to uncover any hidden risks or potential issues. For example, if a business owner is wearing multiple hats and performing several roles, it could be a sign that the business is not profitable enough to support additional staff. This is something that buyers need to be aware of when evaluating a business's potential for growth and profitability.
Overall, the podcast emphasizes the need for buyers to be diligent and thorough when evaluating small businesses. This means working with experienced professionals, asking questions, and digging deep into org charts to uncover any hidden risks or potential issues. By taking a careful approach to investing, buyers can minimize risks and maximize returns, ensuring that they make informed decisions about the businesses they choose to invest in.
Concept 8: Sustainability Is Key For Tech
One key theme that emerges from the podcast is the importance of sustainability in the tech industry. The speakers note that sustainability is a critical consideration for small businesses, especially those with limited resources or a lack of technical expertise. Without a sustainable business model, these companies may struggle to survive in the face of changing market conditions, new technologies, or other challenges.
To ensure sustainability, buyers must carefully evaluate the technology stack and code base of the businesses they are considering. This means looking at the underlying infrastructure, software tools, and programming languages used to build and maintain the business. By doing so, buyers can determine whether the technology is up-to-date, scalable, and adaptable to changing circumstances.
Moreover, buyers must consider the long-term viability of the business. This means evaluating whether the business is likely to continue generating revenue and growing over time, or whether it may stagnate or decline. To do so, buyers may need to examine factors such as the competitive landscape, customer demand, and market trends.
In addition to these considerations, the speakers note that buyers must stay up-to-date on new technologies and trends in the industry. This means working with experienced consultants and professionals who can provide insights into emerging technologies such as AI and other advanced software tools. By doing so, buyers can stay ahead of the curve and ensure that they are investing in businesses that are poised for long-term success.
Overall, the podcast highlights the critical importance of sustainability in the tech industry. By taking a careful and thorough approach to investing, buyers can minimize risks and maximize returns, ensuring that they make informed decisions about the businesses they choose to invest in. With the right approach, buyers can help to ensure the long-term success of small businesses in the tech industry, driving innovation and growth for years to come.
Concept 9: Tech Platforms Need Regular Review
One key takeaway from the podcast is the need for regular review of tech platforms. As technology continues to evolve at a rapid pace, it's crucial for businesses to stay up-to-date with the latest trends and tools. This means regularly assessing the platforms and languages that their software is built on, and making necessary updates and changes to ensure that it remains sustainable and effective.
The podcast suggests that businesses should take a proactive approach to platform review, rather than waiting until a problem arises. By regularly assessing their technology stack and identifying potential issues before they become major problems, businesses can save time and money in the long run. This may involve migrating to more modern platforms, or making smaller updates to existing systems to ensure that they remain compatible with the latest tools and technologies.
Another key point raised in the podcast is the importance of due diligence when investing in tech businesses. Buyers must carefully evaluate the technology stack of the businesses they are considering investing in, to ensure that they are sustainable and have a solid foundation for growth. This may involve working with experts in the field to assess the codebase and identify potential issues, as well as evaluating the business's overall strategy and market position.
Ultimately, the podcast highlights the critical importance of sustainability in the tech industry. By taking a careful and proactive approach to platform review and investment, businesses can help to ensure the long-term success of small businesses in the tech industry, driving innovation and growth for years to come.
Concept 10: Objective Risk Assessment For Acquisitions
One of the key takeaways from the podcast is the importance of objective risk assessment for acquisitions in the tech industry. The speaker explains that while some buyers may have a higher risk appetite than others, it is important to provide them with a clear understanding of the risks associated with a particular investment. Rather than making a go or no-go recommendation, the speaker suggests that objective analysis of the major issues can help buyers make informed decisions about whether or not to proceed with a purchase.
The speaker emphasizes the importance of sustainability in the tech industry, and notes that taking a proactive approach to platform review and investment can help to ensure the long-term success of small businesses. By identifying and mitigating risks, buyers can make more informed decisions about which businesses to invest in, and can help to drive innovation and growth in the industry.
The podcast also touches on the issue of failed deals, and suggests that there may be opportunities to circulate deals that have fallen through to other buyers who may be interested. This highlights the importance of building strong relationships within the industry, and being open to exploring new opportunities even in the face of setbacks.
Overall, the podcast underscores the importance of objective risk assessment for acquisitions in the tech industry, and highlights the critical role that sustainability and innovation play in driving long-term success. By taking a careful and proactive approach to investment, businesses can help to ensure the continued growth and success of the industry for years to come.
Concept 11: Transparent Fixed-Cost Pricing For Diligence
One key aspect of this approach is transparent fixed-cost pricing for diligence. As discussed in the podcast, Rapid Diligence offers a range of services for businesses looking to buy or invest in online companies, including e-commerce, content, and Amazon FBA/KDP businesses. Their ideal clients are those who are looking for by-side help and full-scope diligence services, particularly for acquisitions in the sub-10 to 15 million dollar range.
What sets Rapid Diligence apart, however, is their commitment to fixed-cost pricing. As the podcast notes, this approach helps to avoid surprises for clients who may be looking to buy a small business. By providing upfront pricing information on their website, Rapid Diligence ensures that clients can make informed decisions about their investment without worrying about hidden fees or unexpected costs.
Furthermore, Rapid Diligence offers a range of packages and services to meet the needs of different clients. These include live verification reports, quality of earnings assessments, and code-based reviews, among others. Pricing for these services is based on a fixed-cost model, with prices increasing slightly for larger businesses.
Overall, the podcast highlights the importance of transparency and clarity in the diligence process. By providing objective assessments of risk and offering fixed-cost pricing options, businesses can make informed decisions about their investments and help to ensure long-term success in the tech industry.
Concept 12: Content Businesses Require Persona Continuity
However, one particular topic that stood out in the podcast was the concept of persona continuity in content businesses. The guest and host discussed how buying a content-based business, such as a podcast or a recipe website, requires the buyer to maintain the persona or brand that the audience has come to know and love.
For example, in the case of a podcast, the host is often the face and voice of the show. The audience tunes in because they enjoy the host's style of interviewing or the guests they bring on. If a new owner were to take over the podcast and change the host, there could be a significant decline in listenership. The same goes for a recipe website that has developed a persona around the owner, such as a wife and mother named Kathy. If a new owner were to take over and change the persona, the audience may lose interest and stop visiting the website.
This concept of persona continuity is crucial in content businesses because the audience has developed a relationship with the brand or persona. They have come to expect a certain style or voice, and any significant changes could lead to a decline in engagement and revenue.
The podcast also discussed potential solutions to this issue, such as bringing on a trained voice actor to maintain the style and voice of the previous host or persona. This solution would require careful consideration and planning, as it could still lead to resistance from the audience.
In conclusion, content businesses require persona continuity for long-term success. Buyers must consider the importance of maintaining the brand or persona that the audience has come to know and love. Any significant changes could lead to a decline in engagement and revenue. As such, careful planning and consideration are necessary to ensure a smooth transition and maintain the audience's loyalty.
Concept 13: Due Diligence Saves Headaches
However, before any acquisition takes place, due diligence is crucial. Due diligence is the process of investigating a business or person before signing a contract, and it can save buyers from headaches down the road. In a podcast with Ronald Skelton, Ahmed Shaikh, the CEO of Rapid Diligence, emphasized the importance of due diligence in business acquisitions.
Shaikh stated that a minute spent in due diligence is an hour of headache saved after the business is acquired. This is because due diligence allows buyers to thoroughly investigate the business they are considering purchasing. During this process, buyers can ask for any data they need to make a comfortable buying decision. This includes financial data, contracts, and any other relevant information. By doing so, buyers can ensure that they are making an informed decision and avoid any potential surprises after the acquisition.
Shaikh also emphasized the importance of taking time to understand and do proper due diligence. This means not only looking at the numbers but also taking a step back and understanding what the buyer is purchasing as a business. If something feels off, buyers should dig into it during the due diligence period. This period can last anywhere from 30 to 90 days, and buyers have every right to ask for any data they need to make a comfortable buying decision.
Shaikh also noted that once the due diligence period is over, buyers do not get to go back and say they missed something or wish they had asked for more information. Therefore, it is crucial to take advantage of the due diligence period and make sure that the business being purchased makes sense.
In conclusion, due diligence saves headaches. It allows buyers to thoroughly investigate a business before making a purchase and avoid any potential surprises down the road. By taking the time to understand and do proper due diligence, buyers can make an informed decision and ensure that the business they are purchasing makes sense. Therefore, buyers should not overlook the importance of due diligence in any business acquisition.
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