Due Diligence Continued

To continue on from yesterday about due diligence, management or leadership of the endeavor/business is just the first place to start. The next step is to find out everything possible about the industry. Is this a new product or service that never existed? Is there competition? What are the industry rates of returns for similar products or services? Is the new product or service protected legally in any way in terms of patents, trademarks, copyrights, etc.? What are the barriers to competition? How easy or difficult will it be for someone else to come in with a cheaper and better version?

Once that information is analyzed, the next step is to look at how that product or service will be brought to market for sale. Even the best ideas sometimes never make it to market successfully. First, is all the research and development needed for the product completed? Is more money needed for R&D? How long will it take before it is commercially available? Where or how will it be distributed to those markets? What profit percentages are given up to wholesale distributors, sales force, and special purchase incentives? What additional administrative and sales expenses are included? What is the impact on corporate taxes? Are there tax incentives available in the industry or for the product?

As you can see, this can become very involved. This is why it is extremely important that the management has the right people in place to make sure all of these critical elements are dealt with effeciently and also cost effective. Typically, investors will not have access to all of this information, so they will focus on the research on the leadership of the company and key details of the industry and market size. The remaining information may be contracted out for additional due diligence.

If this seems to be too difficult for the average person, you are right. That is why they are average. The wealthy have learned that these details are the reason for, not only how to create wealth, but to protect it when economic changes occur.

My, are there economic changes occurring now! Earlier this week I mentioned that gold was nearing an all time high, as is the price of oil, the dollar is weakening to record levels, etc. During times like these the wealthy are considering, if not moving, their assets from a depreciating asset to one that is appreciating. They are looking to grow the value of assets, not watch them erode.

Instruct a wise man and he will be wiser still;
teach a righteous man and he will add to his learning. Proverbs 9:9

There will be more ... stay tuned!