When Is a Deal Too Good to Be True?

You’ve heard it a hundred times: “If it sounds too good to be true, it probably is.” The problem is, it can be difficult to determine what’s really too good to be true and when you’re looking at a great deal that, over time, is going to make you plenty of money.

When is a deal too good to be true? If it has some of these key characteristics, you might want to consider whether or not it will ultimately have the return you want.

You’re Encouraged to Make a Snap Decision

If the acquisition looks great at first glance, you’ll probably find yourself eager to jump into it. Before you make the acquisition, however, you need to do your due diligence: understand the company that’s selling, what it is that you’re acquiring, and any other critical information about it.

Any time a company encourages you to make a decision on the fly, without taking the time to do that critical research, you should be wary, as it could be a sign that everything doesn’t look as good under the hood as it does on the outside.

Just like you wouldn’t walk onto a car lot and walk away with a car without a test drive, make sure you take a new acquisition out for a spin and do your research before making a decision.

Keep an eye out for red flags that suggest that you don’t have time to do the research yourself before you jump on board with a particular investment opportunity.

The Timeline is Aggressive

Any time a deal promises high dollar returns in a hurry, you need to take a closer look at where the projections are coming from and how they’re expected to hit that mark.

Typically, investments take time to turn your money around and start showing returns. It’s not going to happen overnight–and that’s something you should expect going in.

If you’re presented with an aggressive timeline that suggests that you’re going to get the results you’re after from your investment in a matter of weeks when experience tells you it should be months or months when experience tells you it should be years, chances are, the deal is too good to be true.

The Market is Too Large

Any new business or business expansion needs a target market–buyer personas to whom they will target their product. When you’re approached with a new acquisition opportunity, take a hard look at the target market presented by the offer.

Have they taken the time to narrow down the buyer persona and understand who will really want to purchase their product, or is this a company that is struggling to manage their expectations appropriately? A strong target market will:

• Be specific: it should include clear buyer personas and an explanation of how they will benefit from the product or service being offered.
• Include a specific pain point for those customers and what they need out of the product or service.
• Be broad enough to include enough potential customers to support the business model over time.

If the target market is too broad, it’s possible that the product won’t be able to reach anyone–or worse, that it will go to production with vast assumptions about return on investment, but will end up with far too much merchandise for the actual needs of the market.

 

Things Are Ramping Up Too Fast

Changing a company takes time. Many companies successfully experience periods of rapid growth, but that growth doesn’t come without effort and some growing pains. A business that plans to expand too quickly can come along with a number of problems:

• Financial information can quickly become convoluted, misleading, or difficult to interpret correctly.
• The business isn’t able to hire the right people to maintain sustainable growth within the organization, which means it has a higher chance of crashing and burning.
• The business loses touch with the needs of the customers and fails to deliver the products or services they really want.

If the business has an aggressive plan for growth, make sure that it follows sustainable lines and that there is a strong plan in place to support that growth, including the right people and resources to keep the company moving in a healthy direction.

Terms Are Confusing and Interchangeable

When you’re sitting down to read the paperwork for a new deal, always make sure you understand the terminology involved. If the terminology is confusing or you aren’t sure that you understand what the paperwork actually says, ask for more specific information.

Before you sign on the dotted line with a new acquisition, make sure you fully understand the terms that are being used, how measurements–especially financial ones–are made, and that you’ve had an independent assessment of the actual value of your acquisition.

 

You Can’t Get Information 

It’s only natural that before you make a major acquisition, you want to do some research. While you can do a great deal of that on your own–and should–some of the information you want needs to come directly from the company.

If you’re stalled any time you request paperwork or critical information, especially if you’ve discovered that information that should be a matter of public record isn’t, it might be time to look elsewhere for an acquisition.

If it’s a legitimate offer that will really pay out as expected, they will be eager to give you everything you want to know.

If you fail to do your due diligence at the beginning of the acquisitions process, it can quickly transform from a fairy tale to a nightmare. Before you know it, you’ll find yourself losing money on what seemed like a perfect deal.

By carefully evaluating your offer before making a decision, discussing it with professionals you trust, and making sure that you have all the information up front, you can improve your odds of a successful acquisition.