Q & A: How Do I Evaluate This Business? Real-World Due Diligence 5

This question was posted on my “ask me” page on my timberry.com site. I can’t promise to answer all the questions I get, but I try, and I’m particularly happy when I get one whose answer might be useful to other people. Those I post here or on my main blog. This question came from somebody who lives on an island that is a frequent stop for cruises:

My partner and I are planning to purchase some ground tour excursions from an existing operator.  How do we go about evaluation of the tours that will be assigned to us.

As background, for you as my reader, I did some tour guiding in my youth and I’ve been on a couple of cruises and dealt with the shore excursions, so I think I know enough to explain what business we’re talking about. The company at the tour stop destination packages and productizes local tours for passengers on cruise ships. They get the ships to list their excursion as one of the options during a day at that port. The cruise company collects the customers and their money, delivers the customers to the waiting tour buses, and delivers a share of the money to the local company offering the excursion. The local company offering the excursion supplies the itinerary, the local guides, local transportation, admissions, food, and so on, according to what’s offered in the excursion.

So I gather from the email that the person who asked this question is a tour operator at a local cruise destination who has been offered some excursions by a fellow tour operator. The seller wants money for selling the product, product rights, relationships, and know-how to the would-be buyer. Or so I guess. (It’s just an email; I don’t know the person; so I have to make assumptions).

BTW, a vocabulary note: in entrepreneurship we refer to “due diligence” as the process of checking out a proposal for flaws, the equivalent of kicking tires, making sure what’s said is actually true. And due diligence applies generally to all business situations involving a buyer and seller of a business or a portion of a business. It’s not just for angel investors and venture capitalists.

So a lot of my answer here applies generally to the process of due diligence.

And here’s my answer:

I’m sorry, but you have to be very skeptical. I know this is very hard when you have a personal relationship with the seller, but you should start the discussion by making it clear that despite relationships (if you do have them) you deal with business as business, so you will be checking facts and talking to people to validate information. Tell them right in the beginning that if that’s a problem, then you’d rather not mess up the relationship, so they should sell it to somebody else.

Having said that, here are some things you can do:

  1. Ask the sellers for all the information they have. That should include financial statements, tax statements, communications with customers, emails, excursion details, costs, billings, contact information from the cruise ships, contact information for happy customers, history of complaints and how they were followed up, information including contact information for vendors (bus companies, restaurants, etc.) and contact information for past customers too.
  2. Don’t trust what you get back. Assume the information you get back has been carefully filtered to leave out anything that doesn’t support the sellers’ arguments.
  3. Take the time to actually do the due diligence. Call everybody you can. Call every cruise company that ever stops in your port, find the right contact (see below about contacts), and check out the cruise company’s relationship with the excursion. Ask the cruise company to validate the numbers. Ask them to give you names of the tour directors on the ships, and if possible (although this isn’t likely) some happy and some unhappy customers. Do they get complaints? Have they used this excursion? How long? How does it stand up to others? If they haven’t used it, why not? Call every vendor and ask them about the excursion. Call every customer whose contact information you can get.
  4. When calling people, particularly when calling companies like bus companies, restaurants, and especially big cruise companies, who to talk to is an important variable. You have to guess at first, from the website, or from the information you were given. Expect that you’re going to have some calls to the wrong people, who will not be able to help. When you call a person who doesn’t seem to be able to answer your questions, never get off of the phone without asking them who in their organization they think you should be calling. Eventually you’ll get to the right person.
  5. You must always go beyond the information the sellers give you. You can get tricked. They can have friends answering the phone. Go to the tax information, competitors, and whoever else you can think of.

And, by the way, for anybody looking to buy a business: Please consider how what I’m suggesting here for buying tour excursions might apply to your situation and the business you’re thinking of buying.

Never skip the due diligence.

About the Author Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry. Follow Tim on Google+ Read more »

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  • http://www.ideacockpit.com Tom McLaughlin

    Thanks Tim,
    Sage advice to those looking to take over a business relative to due diligence. I sense that the same applies to other startups in terms of the needed “testing of the water” before jumping in. It’s a pleasure to see the level of authority with which you write.
    Tom McLaughlin

    • http://timberry.bplans.com Tim Berry

      Tom thanks, I’m glad you see it that way. That’s what I was hoping. Thanks, Tim

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  • Will Steel

    Tim,
    Very good read but I would like to point out to your readers that if you are buying a business that is being sold privately or through a broker you are obligated to abide by the rules of the non-disclosure. It is as important to protect the confidentiality of the business and its proprietary information as it is to investigate the business. Leaked information or even rumor of a sale can be devastating to the business as well as beneficial to competition. That goes for the owner of the business remaining in place or the prospective buyer should they execute and purchase. A seasoned broker can be very beneficial in this process and why I recommend relying on them for guidance as much as possible.

    • Tim Berry

      @Will thanks, good addition.