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How to Evaluate a Business (Part 2)

Due Diligence

Author

Chris Munn
November 25, 2024

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The 40 Best Due Diligence Questions

Welcome to part 2 of our evaluating a business series. Today we’re diving into the topic of due diligence.

If you didn’t read part 1 on EBITDA vs SDE vs FCF, start here

If you did read part 1, thank you.

*Don’t forget to save our due diligence questions & worksheet (see: additional notes)*

Due Diligence


You’ve heard the story. Guy quits his job. Buys a business. It goes to sh*t. He struggles to recover or even pay his loan.

If I’m being honest, it could happen to anyone. The best PE funds in the world sometimes get burned.

But there is hope. A good deal starts with good due diligence. And over the years I’ve developed 100’s of questions that can be asked to sellers when buying their business.

Today I’ve narrowed that list down to what I think are the 40 best ones. Some are straight forward. Some are quirky. But they’re all meant to reveal truths.

At the end of the day, due diligence is a truth seeking endeavor.

What is Due Diligence?


If you don’t even know what due diligence is, here’s a funny story:


My friend Brent has a great story about due diligence. He was buying his first business and a mentor told him that due diligence was a critical part of the process. And in order to vet a business properly, it needed to be done.

So Brent wrote down in his notebook, “Do diligence.”

Now Brent manages a portfolio of businesses worth hundreds of millions of dollars.

Lesson: Start where you are.

Is the business we’re looking at a good one? Is the seller telling me the truth? Is the broker glossing over anything important?

“We won’t know until we get them on the table.”


(Everyone’s favorite bad TV show Law & Order SVU uses this line all the time. The cops come and ask the medical examiner a question, and her response is always, “We won’t know until we get them on the table” or in simpler terms, until we do an autopsy.)

That is what we are doing here. An autopsy of the business. But how?

The 40 Best Due Diligence Questions

I’ve developed two sets of questions to cut through the noise.

One set of questions is to the seller and the other set is for you.

It’s critical that you also check in with yourself throughout this process and check your own assumptions about the deal.

Some questions I’ve developed over the years are a bit outside the box, but they are great for getting to the heart of what you’re looking to uncover.

Examples:

How long was your last vacation? (Asked to learn if the business can function without the owners day to day involvement)

What have you fired people for? (What cultural standards are in place here?)

How do you make a sale? (How easy is it to buy from this business)

If you would like my full list of questions comment below and I may make them available in a future post.

Questions

To the Seller:

Group 1: Business Operations and Performance

  • What’s your average day look like?

  • What decisions are employees able to make without your authorization?

  • What’s the average tenure of your customers?

  • How do you make a sale?

  • What % of revenue is your biggest customer?

  • Who are your top customers?

Group 2: Financial Performance and Legal Matters

  • Can I receive 3 years of PnL’s, tax returns, and asset list?

  • Are there any known misclassifications on the PnL?

  • Have you ever been sued? If so, what for?

  • Can I receive all legal docs (ownership, registration, etc) for the business?

  • Can I receive copies of your vendor agreements?

  • Are your contracts assignable?

Group 3: Business Growth and Future Potential

  • If you had unconstrained resources, how would you grow this business?

  • What are the 3 biggest needle movers I can tackle to grow this business?

  • What traits do you hire people for?

  • What have you fired people for?

  • If (insert key employee) got hit by a bus, what would happen?

Group 4: Owner’s Perspective and Reasons for Selling

  • How long was your last vacation?

  • Does anyone do work here that they are not compensated for?

  • Why are you selling the business?

  • Who owns the company?

  • How much would it cost to replace crucial equipment items?

  • Does the owners name show up in google reviews?

  • Is the owner holding this operation together or holding it back?

  • Could the owner be useful in some capacity?

To Yourself:

Group 1: Business Fit and Personal Goals

  • Do I want to run this type of business?

  • Do I want to manage these kind of people?

  • Can I devote enough resources to grow this business in accordance with my goals?

  • What is my goal for this business?

Group 2: Business Risks and Challenges

  • Can I survive if the biggest 2 customers cancelled service?

  • Can I survive if (insert ad platform) went down?

  • If debt payment was an issue, what in this business would likely cause it?

  • Is the business Lindy?

Group 3: Due Diligence on the Business and Team

  • What are the strengths and weaknesses of each key employee?

  • Does the sales cycle align with my goals? Long cycle = slower growth, short cycle = faster growth

  • What are 3 things I can change to improve the employee experience?

  • How easy was it to buy from the company?

  • Why are they selling the business?

And always remember that this is more art than science. You still want to be likable and someone the seller wants to do business with. That being said, you’re on a fact finding mission.

Don’t make any decisions until you get it on the table.

Additional Notes:

  • I actually invested in an SMB Deal via Mainshares earlier this year. The platform was truly A+ and I receive regular updates through the platform.

  • If you don’t have your ticket to HoldCo Conf, what are you waiting for? Use my code ‘Builders’ for $1500 off!

  • Here are a copy of the questions and also my longer due diligence checklist