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

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September 13, 2024

by a searcher in London, UK

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 searcher
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.
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Reply by an intermediary
from Naval Postgraduate School in Bellevue, WA, USA
1.inconsistencies in the monthly P&L’s that can’t be easily explained.
2. Ownership that is not using the financials to help run the company.
3. Inventory that is obsolete and/or not turning very well
4. Cleanliness of shop floor (if applicable) and bath rooms. May indicate that management does not sufficiently value employees or working conditions.
5. Gross margins and Revenue per FTE that are less than national averages
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