The video Matt is reacting to nails the basics of private equity due diligence, but here’s what it leaves out: Due diligence is for everyone investing in a business.
From checking financials to uncovering legal risks, this process is about knowing what you’re buying and how you can make it better.
There are tons of people out on social media giving business advice. Some of it is good advice, but most of it isn’t good. In this series watch CapForge’s owner react to different advice videos. He’s an expert in all things business and has 20+ years of experience under his belt. Some of the things he reacts to might even surprise you!
Video Transcript:
Business Advice Video:
What is due diligence, and why do you need it in private equity? I learn best with analogies, so here we go. Imagine you’re buying a used car. You wouldn’t just hand over the cash because the car looks good on the outside, right? You check under the hood, test the brakes. In private equity, due diligence is exactly that process, but for companies. When PE firms are thinking about investing or buying a company, they dive deep into something called a data room. This is a secure online space where the company has to share their records. Like for a car, you want to know its accident history, service records, and maybe even the owner’s manual. Here’s some things you would analyze in a private equity data room. One, financials. Are the revenues real? Is the business profitable? Two, operations. How does the company actually run? Three, market potential. Is the industry growing? Who are the competitors? Four, legal risks. Are there lawsuits lurking in the background? But due diligence isn’t about just finding out what’s wrong with the company. It’s making sure that the company can deliver on its potential. Due diligence is the ultimate trust, but verify.
Matt’s Review:
So, I would say what she’s talking about is true as far as it goes, but private equity is definitely not the only situation where you need due diligence. Anytime you’re buying a business, whether it’s a small, you know, hot dog stand or a $10 million a year complicated manufacturing business, if you’re buying it, you’re buying it with some investor friends, you’re part of a private equity firm or whatever, whoever the buyers are, it doesn’t really matter. The point is, if you’re gonna spend money to invest in an asset that you’re hoping is gonna produce future cash flow. You want to do your due diligence to make sure there’s nothing about that deal that’s going to come back to bite you. That it really is producing what it says, and there’s no reason you, as a new owner, wouldn’t be able to do the same, or ideally, you have a plan to do even better once you take it over. So due diligence is great and what she explained is right as far as it goes, but it’s definitely not just for private equity. It’s for anybody looking to buy a business and take it over and run it successfully. You want to make sure, spend the time and to investigate that before you close the deal to find out if it’s really what you think it is or not.