by rickcolosimo on August 9, 2010
Here’s a recent post by Rick Colosimo in the Five-Minute General Counsel series on due diligence, with an even shorter short form due diligence request list than our own investor-based due diligence list.
One question we haven’t answered here yet is: what is the point of all this? Well, investors/acquirors have three main risks to consider: the risk that you have a plan that can’t be achieved, the risk that the present team can’t accomplish the plan, and the risk of some ugly problem that destroys value. Due diligence, the process, should be designed to uncover information that affects these risks, either in magnitude or probability. But that’s only part of the process, and it’s where many otherwise high-quality “advisors” get stuck.
You have to do something with the information you gather, or it’s close to a waste of your time (the only exception is “keeping the other side honest”). You can do three things with information you find: you can use it to decide to kill the deal (a major patent litigation is this kind of problem); you can change the price of the deal (inventory discrepancies or overly aggressive business model assumptions are good examples), or you can change the terms (founder IP transfers are a good example). Allocating risks to the other party is one very common way of changing the terms of the deal.
by rickcolosimo on August 8, 2010
I’ve often thought that there are two kinds of businesses: those that make money from providing more value to customers, and those that make money from providing less value to their customers.
This brief article describes 5 grocery store ripoffs. I’d add Trop50 to the list, as noted also in the comments here. Trop50 is Tropicana orange juice with half the sugar. Awesome, until you look at the label and realize they added water so it’s only 50% orange juice. And the last time I looked, they actually charged MORE per half gallon of half-juice than for a half-gallon of pure juice. Are their customers really so pressed for time that they can’t mix juice with water when it’s coming out of the fridge?
And this isn’t bashing — consider a twist: like many parents of young kids, I have a love-hate relationship with juice boxes. It’s not about crappy drinks anymore — you can get organic fruit/vegetable mixed juices at Costco easily enough. No, it’s that my kids drink 50/50 juice/water mix at home, but juice boxes come in 100% juice unless you buy junk.
What if Tropicana put their great juice in a 50-50 juice box, where I get more value because I can give my kids the drink I want and can’t readily mix it myself?
So that’s an anecdote. Walk around tomorrow with your eyes open and think about the companies you interact with: who gives you more value? Does Costco? It’s certainly part of their proclaimed brand identity (salmon story, anyone?).
Now, think back to the title of this post: which kind of business are you building? When you think about the sustainability of your business, do you see a future in which it becomes increasingly easier to deliver less and less to your customers? Or one in which the amount of value you deliver is limited only by your imagination? Is your business one in which you expect to disappoint customers regularly and so need to plan to ensnare new ones consistently? Or do you expect to keep your customers happy and seldom see them defect?
Which kind of business are you building? Tell us in the comments.