Due Diligence For Businesses

Today’s guest post is from James at DINKS finance:

This posting will be on the topic of doing due diligence when evaluating investment opportunities. When I’m talking about investment opportunities, I’m speaking specifically about taking part in new business start ups. I’m not speaking about investing in stocks or loaning money to people at interest. To invest properly in new businesses, you’ll have to do what’s called “due diligence” or simply put you need to do your homework.

Here are some thoughts on doing this:

1) Research the market. All business operate within given markets. You should consider the demand for the product or service that your candidate business would produce. For example, if you might be considering investing in an internet start up. In this case you should consider the demand for the software or service the company is producing. Is it an American company which is feeling pressure from Indian or China? Is the product going to be used by a growing industry? So, to summarize you might consider using the internet to get a sense of the market.

2) Talk to People. An acquaintance of mine took a position in a chain of Buritto restaurants in Louisiana. After hearing about the opportunity from his father he went to the restaurant and talked with the employees and a couple of the customers. In addition to talking with the businesses staff, you might also consider speaking with people you know who are knowledgeable about the industry you’re considering. For example, when my wife and I were thinking about doing a real estate development in Portland, we talked with my uncle, who is a contractor and keeps an eye on trends on real estate on the west coast. With his help we were able to determine that the proposed development wouldn’t be profitable, so we decided to shelve the idea.

3) Go Over The Numbers. You might consider sitting down with a spreadsheet and figuring out what the projected profit and loss numbers look like for the first two years of your prospective businesses. Consider factors like projected profits, the probability of losses, tax implications, staffing costs, etc. If under a set of reasonably conservative expectations your company wouldn’t be make money then you should think twice about investing. The main point here is to put some numbers to the situation to critically about the company’s potential profitability.

Finally, direct investing can be both a challenging but very rewarding experience. However, to avoid losses you’ll need to exercise due diligence. Hopefully these tips will help you think critically about how to do this.

How to become a Billionaire

Donald Trump wrote a book called “How to think like a billionaire’, which is by far the worst piece of crap ever written on Investing.  A far better book is The Art of the Deal which you can buy for under a buck! [Warning: None of the Donald’s books are on humility. They’re on creating a larger than life image and full of self-promotion and bragging. But then he’s not known for being modest.]

Anyway, I digress. The main focus of this post is this article, 7 ways to join the billion-dollar club. It essentially focused on businesses, but I realized with applies just as well to Real Estate Investors.

Here’s the gist of it:

1. Create and sustain a breakthrough value proposition.
Only buy value. Don’t go for those speculative deals and risky investments. Like buying in San Diego after everyone and their mother has gotten into investing there. Buy in places were the locals are still skeptical.

2. Exploit a high-growth market.
Find out which places are set to explode in terms of population and job growth.

3. Focus relentlessly on cash flow.
Hell yeah! Don’t buy property which doesn’t cashflow even after you put 20% down. That’s speculation. You’re not buying the value, but the hope that’ll it continue to appreciate and some other fool with take it off your hands.

4. Leverage big-brother alliances.
Find people like you and band together to get better pricing with builders and property managers. Even if you don’t always get better pricing, you usually get better service.

5. Pack your board with industry experts.
Always read up on the experts like WSJ.com and John Burns. Listen to the “gurus” but don’t follow them blindly. They always have something to gain so they’re advice is always biased.

6. Use marquee customers to build credibility.
Once you’ve done a few deals with partners, use them to promote your credibility. This is particularly useful when you want to raise money for a new project.[In my previous post I mentioned that buying foreclosures requires a lot of cash. This is where your credibility comes in handy].

7. Build an inside-outside leadership team.
You’ll need great people to handle the inside business[lawyers and CPAs] and the outside business[agents and property managers].

There you now know how to create a billion-dollar empire!

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