Authors: Tina Thomas & Jody Squires
Your company’s partners have found investors, you have raised capital, you have generated transaction leads, and now you have a potential deal. Maybe you have gone so far as to do some initial research into the company’s principals. Now what? Now it is time conduct a consented comprehensive due diligence investigation. Investigators are your partners and work with you and the principals to conduct “friendly” and transparent background checks.
A due diligence investigation is conducted to confirm information already provided to you by the target. This will help your company know this investment is solid and there are no critical red flags that could be a deal breaker (e.g., omitted liabilities and risks). What information is critical to your company that might kill a deal? Each company’s risk tolerance is different.
In the past clients have told us a divorce case is not important, or they do not want to know too much personal information about a subject. That is a mistake. Divorces can provide critical information such as:
- Business Holdings. A big payout due to the ex-spouse if the subject company is sold or transferred. You do not want to have an unexpected check to pay out after your deal has closed because you did not obtain copies of a divorce settlement.
- Negative reputation. Some divorces can elude to an individual’s involvement with company theft, internal cover-ups, debt, or otherwise. We previously identified a police report from a divorce record lead. No criminal action was the result of the report; however, the narrative described an unstable party.
- Criminal records or arrests. We had a case in which we searched the state police for criminal records, and local jurisdictional criminal courts for the individual as well. All searches were returned clear with no records. However, the divorce case specifically outlined how the individual was arrested for theft and had stolen money from a family trust fund. The individual’s defense was he had “borrowed” the money for his business to keep it afloat. The subject business was involved with this transaction. Had we relied on criminal searches only, this individual would have come back completely clean. There was an arrest with no conviction; however, the individual had all of his criminal record expunged. Our client took another look into the business finances and the source of the funds. The business was not as successful as first portrayed.
If the target company is going to become a portfolio company, a leveraged buyout or a venture equity investment and could be liquidated by another company down the road, it pays to conduct a comprehensive background investigation now to avoid embarrassment in the future.
Share this with your associates, brokers, partners, and legal counsel.