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The Investment Red Flag Checklist
Use this Quick 15 Question Due Diligence System Learned from $250m of Mergers and Acquisition Deals
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How long has this business been operating?
Less than One Year
1-3 Years
3-5 Years
5-10 Years
More than 10 Years
I Don't Know
Other:
Clear selection
How many people work there?
One Man Band
2-5 People
5-12 People
12-30 People
30-100 People
More than 100 People
I Don't Know
Other:
Clear selection
What's the Revenue?
Startup/ Idea phase
$0-500K
$500k-1m
$1-3m
$3-5m
$5-10m
over $10m
Don't Know Yet (why not dude...)
Other:
Clear selection
Profitable? What's the Gross Margin of the Company?
Close to 100% Margins (For example a consulting business)
Over 50% Margins
25-50% Margins
10-25% Margins ( mildly profitable)
Breaks Even
Losing Money ( -15%- 0% Margin)
Losing a lot of Money (Worse than -15% Gross Margin
Don't know yet
Other:
Clear selection
Revenue aside, what's their balance sheet like?
No Debts and Very Few Assets
More Assets than Debt
More Debt than Assets
Large Assets and Debts, more assets than debts
Large Assets and Debts, more debts than assets
I don't know
Other:
Clear selection
How much funding are you thinking of putting into this Deal?
I'm thinking of putting everything I have into this deal
I'll be paying but it won't be a large part of my portfolio
I don't plan on putting any money into this deal, and that's realistic
I don't plan on putting any money into this deal, but I'll tell that to the sellers later and hope for the best
I haven't got that far yet
Other:
Clear selection
Does the business need a cash buffer post-acquisition (to buy new inventory etc)
Yes and we've prepared for that (they'll provide the cash)
Yes and we've prepared for that (I'll provide the cash)
Yes and there's no plan
I haven't thought about it
Other:
Clear selection
How Involved are the Owners in the day-to-day Operations ?
They Manage Everything
They're there Every Day
A Few Times a Week
They check in on how things are going once a week
They are Completely Passive
Don't Know Yet
Other:
Clear selection
What percentage of the revenue does the top 3 customers have?
Less than 10%
10-25%
25-50%
50-75%
The Vast Majority of the Revenue
Don't know yet
Other:
Clear selection
How Reliant is the Revenue on Advertisements?
0%, Totally Organic Traffic/Word of Mouth
1-25%
25-50%
Half and Half
The majority of sales comes from ads
100% ad Dependent
Don't Know yet
Other:
Clear selection
What deal structure have they offered?
Cash Up Front only
Debt based Leveraged buyout
They're fine with lending but banks won't finance it
Seller finance under 25%
Mostly Seller Financed
We haven't talked about it yet
Other:
Clear selection
How many Regional Competitors are there?
It's a Local Monopoly
Very Few Competitors (Big fish in Small Pond)
There's a Fair Amount of Similar Sized Competitors (Rollup Opportunity?)
There's Many Competitors
There's Several much Bigger Competitors (Small Fish in Big Pond)
I Haven't Checked that Yet
Other:
Clear selection
Are they adding loads of add-backs on their cash flow?
No add-backs and no games
Reasonable add-backs to take with a pinch of salt
lots of silly add-backs
What's an add-back?
Other:
Clear selection
How Quick are they being with handing over information and documents
Very Prompt and thorough documents
They're sending documents moderately quickly
They're sending balance sheets but not cash flow
they're showing what they have but they don't have very thorough accounts
I haven't really asked them for anything (come on don't be shy)
Other:
Clear selection
Why do YOU think they're selling (Not just what the broker says)
Retiring
They've got a better idea/ New business they want to do
They're Losing Money
Quitting
Too much Competition
Illness
Debts
Don't know
Haven't asked them
Other:
Clear selection
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