Due Diligence
Why Good Deals Can Be Bad Businesses
The Due Diligence finale: a "good deal" and a "good business" are different things — and a cheap price can't rescue a fundamentally bad business. Ask "is this a good business?" first.
- Intermediate
- 14 min total
- 13 chapters
What decision this helps you make: Whether you're buying a good *business*, not just a good *deal* — the last check before you commit.
- Related calculator: Supplier Risk Scorecard
- Related data & research: Due Diligence Master Worksheet
What this topic is
The capstone of due diligence: a good deal (low price, easy terms) and a good business (durable demand, real cash flow, transferable value, a defensible position) are two different things — and confusing them is how buyers get hurt.
Why it matters
A cheap price on a fundamentally bad business is a value trap, not a bargain — a bad business destroys value faster than a cheap price saves it, and the low price usually reflects real problems. All of diligence exists to tell the two apart.
Who should learn it
Anyone about to commit money to a business — the last check before you sign.
What you will understand
- Distinguish a good deal (terms) from a good business (fundamentals)
- See why a cheap price can't rescue a fundamentally bad business
- Understand the value trap: attractive terms on a bad business
- Ask "is this a good business?" first, "is this a good deal?" second
Prerequisites
Common misconception
"It's such a good deal — cheap, with seller financing — so it's a great opportunity." A good deal and a good business are different things. Attractive terms on a fundamentally bad business aren't a bargain — they're often why the terms are attractive (the seller and market already know it's troubled). A bad business destroys value faster than a cheap price saves it. Ask "is this a good business?" first — because no price is low enough to make a bad one worth owning.