Herman: John L. Herman Jr., Author

Information Ignored: Due Diligence

Eventually today we will get to the term Due Diligence, but for now let’s talk about why a business is “born.” Why is an Aquarium Store opened, or a Bird Feed Shop started, or a million of those cutesy “small gift boutiques” scattered throughout America…where within a year or two they are suddenly gone, just as suddenly as they appeared? Because these are ego businesses.

Someone likes fish, has always owned an aquarium, reads about fish, buys little trinkets for their personal fishbowl at home and then a bell goes off in their heads…why don’t I open an Aquarium Store where I can turn my hobby into my business? Because there are not that many other people who love those fishbowls as you do! Another person stays home all day while their spouse works. They get bored. They whine a lot to their spouse…and they chatter about how the only friends they have to share time with are the lovely birds coming to the sixty bird feeders they have out back…so they can stand in the kitchen and smile at the little critters. Whammo….honey…why don’t I open a bird feed store and sell cute bird houses and wonderful treats so everyone can experience this joyousness? The spouse feels maybe there will be some peace and quiet around the house and there goes another fifty thousand dollars down the drain because after the Bird Feed Store can’t pay the commercial rent, the money making spouse realizes it is better to hear a spouse chirp a little then to put out money for a losing business, and hear chirping anyway about why people don’t love birds enough to buy them treats.

Gift Shops are the easiest to open and everyone believes the notion that just putting stuff on a shelf, with enough twinkle lights around the store, will turn them into zillionaires, as surely they will have the cutest place in town. Major Gift Item Shows in Dallas, New York, Chicago and Los Angeles make it easy for a novice to hit the shows, write some orders, staple up the twinkle lights and you have a beautiful gift shop. Just like thousands of other little gift shops. With the same Gift Show Stuff. You have to be a real merchant to actually make money in these gift shops. You have to carve out a niche, get to know your customers, market with sales that appeal to customers, and you have to actually be open during days and times people can shop at your store. My wife runs an antiques and gift shop and she shared her building with a gift shop owner who built a great following. Mary could be in the Hall of Fame of gift shop owners, and she could teach all the wannabees how to actually run one of these things. She just retired to spend more time at the beach, and my wife misses her already.

The businesses listed above all have something in common. No one ever did Due Diligence to see if the world actually needed one of these. With the Internet there are thousands of places to research the kind of business you want. Check out franchises, starting with Joel Libava, the Franchise King. Go to the SBA website and get statistics on the type of business you want. When I buy a troubled company I always want to know the liquidation value of the assets, because that is all a bank will lend against. So what would that building sell for at a quick auction? How much would the equipment bring “under the hammer” if the doors suddenly closed. Any Appraiser in real estate or equipment sales can give you a “desktop number” where you can get an estimate and they shouldn’t charge more than a few hundred dollars, unless the assets are worth millions…in which case the owner has already produced a liquidation appraisal for his bank loan.

Information gathering is Due Diligence. But, don’t forget the information that tells you whether the area wants or needs what you are opening. Does a “big box” store a mile away sell everything at a discount that you want to sell at full retail? Is this location really going to draw customers or do you like it because the rent is cheap? Why did the last guy fail and what makes you different? Do you know every number related to your new endeavor? Cost of labor, real cost of goods sold, or how many customers a day you will need just to break even? After thirty years, and hundreds of business buys and sells, my due diligence checklist is automatic…while newcomers waste time and money studying the wrong things…tell me what you are doing as your due diligence and let me help you make your effort more meaningful…c’mon email me…and if it’s a gift shop you want I will have Mary give you a call.

• Posted: 6 February 2008
• Comments: 1
• Category: Business failure

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