Spotting red flags in due diligence that affect long-term profitability

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by a searcher
in London, UK

1yr ago

Spotting red flags in due diligence that affect long-term profitability

I’m really passionate about operational efficiency! I love digging into management structures and examining employee turnover rates. I can really gauge whether a company has the strong leadership and stable workforce needed for sustainable growth.

What RED Flags do you pay close attention to?

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reply by a professional 1yr ago
from University of Nottingham in London, UK

In my experience the most common red flag issues that cause deals to fall over are on the revenue side (revenue recognition is not in line with FRS 102, business has been pitched as having recurring revenue but actually is more re-occurring/one off, customer concentration is too significant) or the adjusted EBITDA side (adjustments proposed by the sell side are too aggressive and can't be justified)

reply by a searcher 1yr ago
from University of Georgia in St. Louis, MO, USA

I'm with George. Your biggest red flags are going to be about how healthy the revenue stream is. If it's recurring, what's the churn? If it's not recurring, but it's reordering (think: beauty products or other consumables), do people reorder? That would also include things like services, where you've got relationships in a B2B setting (think, ditch digging in the construction industry) - do people use your service over and over. If it's truly one-time, how strong are their marketing channels (roofing is an example of this type industry).

Even if the topline is stable, it could be that there's still a bunch of churn under the surface. If that's the case, be really cautious. There has to be a strong sales function or else your revenue is going to tank post-close. Hope that helps.