Sourcing great companies and doing due diligence on small businesses is hard.
Most of the time, it feels like trying to lift a boulder with your bare hands.
After all, if it were easy, we'd all be doing it.
But it's hard for a bunch of reasons. We already know many of the reasons, but when the stakes are high and the process has invisible steps, it's easy to feel like you're the only one struggling:
- Public companies need to file financial statements. But it's difficult to find a small company with quality?financial reporting. 90% of them use cash basis financials, which no lender will lend on. Some of them still use physical dot matrix printouts instead of QuickBooks. Converting their financials into something professional and useful takes money (can be $50K!) and time.
- Winning the trust of the owner is difficult. They are likely to worry that a potential buyer will take advantage of them while the diligence is going on.
- You can't learn much if the owner doesn't share the real data. Taking it on faith isn't diligence.
- Few search funds have enough time and money to conduct?diligence that is as in depth as they want it to be.
- It can be really difficult to understand a market you don't know well in just a few months.
- It's hard to know from a few hours of meetings whether the team is capable and has committed.
- It's even harder to know whether the seller has integrity.
- Legal and regulatory issues can be a deal-killer, and they're hard to learn about without a trained eye. Paying for the right help is expensive (read: $500K+ across all your lawyer, accountant, and consultants).
- If a business is easy to find and understand, it will be bid up to the point where it's overvalued.
- Valuation is hard. If it were easy, the seller wouldn't need someone else to buy their business.
- Just getting to the finish line is tiring and can create unstable emotions for the investor and the entrepreneur.
That's why it's valuable.
(Good luck with the details... the stuff that's not a commodity is where the money is, but it's also where the stress lives).
If you like this content, you can find more like it on the Feta Fund website.
