In journalism they call due diligence or fact-finding and verification, “sourcing.” Certainly a newspaper couldn’t take a story to press relying on only one source for the facts. What if that person didn’t give accurate information or had an ax to grind on the issue or person being written about?
This lack of research integrity could lead to a sullied reputation of the publication, and potentially even lawsuits. It is the job of journalists to corroborate the facts with multiple sources and weave together a factual story with the individual threads given by the different sources.
Poor business research cannot only lead to a sullied reputation, but it can lead to loss of hard-earned money.
Several ways to research businesses or industries were presented last month. What are additional ways to seek out information?
Another more daring source of wisdom comes from actual business owners in the industry. Ask an industry vendor for the names and phone numbers of successful operators outside your intended trade area. Call them. Ask them as many questions as they will answer. Many people like being an expert and don’t mind helping out another person.
If you’re opening a flower shop you may ask, “Which flowers are most popular?” “What have been effective ways for you to advertise?” “What are the biggest unforeseen costs of being a florist?”
You’re asking questions of, and hopefully getting answers from, some of the best in industry. Threaded together, their tidbits can be a blueprint for success.
So far, we’ve learned about the industry from a national perspective. There’s a saying in politics: “all politics are local.” The same holds true for business. How do you learn about your local environment?
One way is pound-the-pavement research. One laundromat operator wanted to find out what market share was for a laundry that was for sale. For about two weeks, he systematically went around to all the laundries and counted the number of loads of laundry being done at each. At the end of 10 visits, he felt comfortable that he had a decent idea of not only that laundries’ market share, but also the size of the market he intended to serve. Both were extremely valuable facts to his “buy” or “no buy” decision.
And finally, one of the best ways to learn about the competitive environment? Call your competition — and play stupid. Ask them how much they charge for a particular product or service.
This is part of market research. But don’t stop with just this basic question. If you’re learning about the septic business, for example, you may slip in a question about “where is the cheapest place to dump the waste,” or “how much do you have to pay a driver to haul dung?” If you act ignorant but genuinely interested, you’d be surprised at what some people will tell you if you just ask.
Phoning the competition isn’t just for the active investor. It should also be a part of a passive investment if you want to be successful.
A mini-storage developer had an ad in a local newspaper seeking investors to pony up about $100,000 each for an out-of-state development. When asked why he was building in another state, he replied that rental rates per square foot were around $90 there instead of $65 locally. This made sense to the prospective investor, but he decided to check out this little fact, anyway. He found the phone numbers for eight storage facilities in this distant town. After calling all eight, he averaged each of their quoted prices. It came out to $66 per foot. This raised enough of a red flag that the investor chose not to invest a dime with that particular promoter.
It is amazing the amount of money people will invest with little, if any, due diligence. Even the most rudimentary questions go unasked. Magazines are chock full of success stories, but they never seem to mention the numerous “life savings” that are squandered due to opportunities never having a chance of succeeding.
The first step in good due diligence is understanding some of the questions to ask. Yes, begrudgingly we say the “rich get richer,” but we should look at some of the characteristics that make this reality true. Successful due diligence is one of these characteristics. As important as it is to act on the right opportunity, it is just as important to walk away from the wrong one.
Damon Carson is a Longmont business owner and small business investor. He can be contacted at firstname.lastname@example.org.