Are prospects for success really as rosy as they seem?
During the investment process, you’re often presented with a business plan or some solid-looking financial projections. Everything looks good on paper, but you wonder – Are the prospects for success really as rosy as they seem?
It’s wise to be skeptical in business transactions, and that’s where market due diligence comes in. Sometimes known as commercial due diligence, this process helps investors verify market assumptions by analyzing the competitive landscape, buyer trends, and industry issues. Will the business attract new customers, or will existing customers remain loyal after the sale? What events loom on the horizon that could alter prospects? Which competitors pose the most risk?
Like any other part of the due diligence process, investors need to verify supplied information, especially in emerging or high-risk industries. So what would a market check-up look like?
Here’s a 5-step process that you can use for market due diligence:
Collect some data – Check with government websites, associations, university libraries, and market research firms for current, historical, and projected numbers. Make sure they’re up-to-date, and verify accuracy by collecting data from multiple sources.
Talk to the experts – Industry experts can supply information not found in the data, including new research and opinion, and as well as leads to additional sources. Ask association administrators or a librarian, and check scholarly publications.
Gather insights from customers – Learn what’s important and what would motivate them to buy. What worked or didn’t work in the past? Skip the surveys, and engage in conversations to discover the unknown unknowns.
Compare the competition – How does the company perform compared to others in the industry? What’s their reputation, and what stands out – good and bad? News, social media, and trade publications are good places to start.
Decide what it means – Take the time to step back, connect the dots, and analyze your findings. Does the data support what you learned through your conversations with buyers and industry experts? If not, why? What are the biggest risks, and how could they affect your investment?
Don’t just take their word for it. Verify current and potential performance by going beyond the numbers and investigating external factors that can affect business outcomes.