Kicking The Tires

Definition

Kicking the Tires is a colloquial expression used in the financial and investment community to describe the process of conducting a preliminary evaluation or due diligence on an investment opportunity, company, or asset. It involves a superficial or initial assessment to get a basic understanding before committing to a more detailed and thorough analysis.

Key Components

  1. Initial Evaluation: The initial, often informal, assessment of the investment or asset.
  2. Basic Understanding: Gaining a general sense of the potential risks, benefits, and overall viability of the opportunity.
  3. Due Diligence: A precursor to more in-depth due diligence if the initial evaluation indicates potential value.

Importance

  1. Screening: Helps investors and analysts quickly screen potential investments to determine if they warrant further investigation.
  2. Risk Management: Provides an early indication of possible red flags or obvious issues that could affect the investment’s viability.
  3. Resource Allocation: Ensures that time and resources are focused on opportunities with the highest potential return by filtering out less promising ones early in the process.

Example Scenarios

  1. Venture Capital: A venture capitalist meets with a startup’s founders and reviews their pitch deck to get a basic understanding of the business before deciding whether to proceed with more detailed due diligence.
  2. Real Estate Investment: An investor visits a property to visually inspect its condition and location before committing to a more comprehensive property inspection and financial analysis.
  3. Stock Investment: An individual investor reviews a company’s recent financial statements and market performance to get an initial sense of its investment potential before diving into a deeper analysis.

Process of Kicking the Tires

  1. Initial Research: Conduct basic research on the investment opportunity, such as reviewing financial statements, business plans, or market trends.
  2. Visual Inspection: If applicable, perform a physical inspection of the asset or property to assess its condition and suitability.
  3. Preliminary Questions: Ask initial questions to the company’s management or representatives to clarify basic details and understand the fundamental aspects of the business.
  4. Red Flags Identification: Look for obvious red flags or issues that could indicate problems or reduce the attractiveness of the investment.

Challenges

  1. Superficial Assessment: The process is inherently superficial and may miss critical details that could affect the investment’s outcome.
  2. Bias: Initial impressions can be biased, leading to potentially hasty decisions without comprehensive analysis.
  3. Incomplete Information: Access to limited information during the initial evaluation may result in an incomplete picture of the investment opportunity.

Best Practices

  1. Structured Approach: Use a structured checklist to ensure all basic aspects are covered during the initial evaluation.
  2. Objectivity: Maintain objectivity and avoid making definitive decisions based solely on the initial assessment.
  3. Follow-Up: If the initial evaluation is positive, proceed with a more detailed and comprehensive due diligence process to validate initial findings.
  4. Consult Experts: When necessary, consult with industry experts or professionals to gain additional insights during the initial evaluation.

Conclusion

“Kicking the Tires” is a useful approach in the financial and investment community for conducting an initial evaluation of an investment opportunity. This preliminary assessment helps investors and analysts quickly screen potential investments, identify obvious issues, and determine if further investigation is warranted. While the process is inherently superficial, following best practices can help ensure that it effectively complements a more thorough due diligence process.