The importance of doing your own due diligence
- Companies trying to sell are incentivized to show better numbers
- According to Drs. Douglas Cumming and Simona Zambelli, funds doing internal due diligence perform better
Seller’s unrealistic projection – a real example
The seller projected a triple in EBITDA for a good company with solid cash flows, whereas
- The company has a stable EBITDA for the last 10 years
- No big CapEx expense
- No big acquisitions
The seller justified this triple in EBITDA to triple the price by saying
- The company’s existing customers would buy more
- The company would get a lot of new customers using existing strategies
As expected, the next-year EBITDA turned out to be very similar to the previous year
You need to understand everything about the company when buying it, e.g.
- The industry
- The sales, such customer concentration
- The income statement
- The accuracy of the historical numbers
Interview as many people as possible
- Consultants
- Industry professionals
- Customers