What are the Biggest Barriers to Doing Due Diligence?

August 4, 2010
By Willard Michlin-CPA

When buying a business one has to see what is not on the financial documents that are provided by the seller. To do that you need to graduate the Sherlock Holmes College of Observation. Mr. Holmes was famous for seeing small clues that appeared to other to be meaningless, but in truth, were the keys to solving the case. In the 20 years of doing business due diligence I have concluded it is not about the information that I am given, us but the information that is withheld or forgotten to be provide.

For example: I am doing due diligence on a shoe store. I started looking at what is the profit margin on the shoes. The profit and loss statement says that the cost of goods sold is half the gross sales income. The business does over half its volume from on-line sales. The prices are listed on the website. When we looked on-line we find that they are selling shoes at a 25% discount, off of the list price. The invoices show that the store cost is half the list price. How can you double your cost when you sell shoes on your website at a discount. The purchase orders show the shoes are mark-up only 50%. I have sent Mr. Watson (the prospective buyer) into the store to investigate this little inconsistency.
I look forward to finding out the answer to this mystery. In the mean time, I have to find a British store that sells pipes and wool hats with mufflers on it.

Willard Michlin is a CPA, and Due Diligence and Business Evaluation Advisor. He has published many articles and is in demand as a public speaker in the Southern California business community. You can write to Willard at info@evaluateabusiness.com and he will always answer your questions. He can also be contacted at his Ventura County, California office by calling 800-864-0420. See other articles and information about his services at: http://www.businessbuyingservices.com

Willard Michlin-CPA #106752, CFE, CBB
American Management Experts of Los Angeles, Inc.
Professional Due Diligence, Business Valuations and Fraud Examinations
www.businessbuyingservices.com
Phone: 805-428-2063 Fax: 805-210-2671
Address: PO Box 780 Moorpark, CA 93020-0780