5 Lessons Learnt By NOT Doing Due Diligence

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Business Challenges

Buying a business can be quite tricky, as this East London entrepreneur found out the hard way.

Luckily for Mthunywa Ngonzo he managed to turn the business he bought into a successful air conditioning company. In 12 months he more than doubled the revenue of Amatola Air Conditioning to almost R2 million. The business is now profitable, and he has paid off the balance of the purchase price from revenues of the business. Jola (his clan name), now owns a debt-free business.

Mthunywa NgonzoMthunywa Ngonzo

However, it was not always smooth sailing and Jola had to overcome numerous obstacles. This is his advice:

1. Why doing due diligence is so important

If you are looking to buy an existing business, Jola has one golden rule: do your due diligence. The same way we make sure that, before we buy it, a car is roadworthy, its papers are in order and we take it for a test drive, we should check out a business. It could be in debt, owe SARS money or have a bad credit record.

Jola admits that he didn’t do this, and he suffered for it. He only found out that the business was not profitable once he was committed and by then it was too late – he had put all his money in.

What you must check:

  • Ask for the last three years’ financial statements
  • Have sales grown in the last three years?
  • If not, why?
  • Is the business making enough profit to cover expenses?
  • Does the business have debt, and can it be repaid? 

2. Understand your market and give yourself the competitive edge

Jola says that you should do market research so you understand the ins and outs of the industry you’re entering. It’s important to know who the industry leaders are, their size and their profitability. Once you have an understanding of the businesses you are going to compete against, you need to benchmark your business against them and assess what you need to do to compete against them.

3. Take advantage of your resources

As a small business owner, you need to be able to use your connections to your benefit. Jola knew he had a substantial network that he could use from his years working in the government and with these contacts, he broke into the public sector. Jola used the knowledge he had of a specific sector to create an opportunity. As a small business owner, you need to be able to think outside of the box and often make your own opportunities.

4. Know your weak points 

Every small business owner will face their own set of challenges they need to overcome. Jola’s main hurdle that he had to overcome was the lack of cash flow and bad credit.

He was unaware that the company he bought had a bad credit rating and that he wouldn’t be able to get credit from his suppliers. This was a huge problem when he started getting new business because he could not purchase supplies.

Jola overcame this challenge by visiting his suppliers and talked to them about his situation and explained that he bought the business without knowing that it had a bad credit rating. He recommends developing a personal relationship with your suppliers and accept that you will need to start small.

5. Why you should have boundaries in your business 

What every entrepreneur needs to be careful of is using company savings when they are short of cash in their personal life. Jola says that this is a mistake so many small business owners make. He has a few tips:

  • Allocate yourself a salary each month
  • Pay your salary into your personal bank account
  • Budget accordingly from the salary that you have
  • If it is possible, have a person in charge of the business’s finance
  • The accountant will keep the business card to avoid any temptation

Each small business owner will be faced with their own set of challenges and there is no one perfect solution. The main thing is that you focus on finding a solution, solving the problem and always learn from a situation.

What are the challenges you face or have overcome in your small business? Start a conversation with is and comment below. 

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This article was written by Themba Mkandla