All too often I hear from my attorney friends that they are working on a deal where the client is concerned about pre-transaction costs. So rather than recommend that a full due diligence be conducted, they take short cuts, especially when it comes to reputation and character. Maybe it’s a general search through Google to see if anything “negative pops up” or a low-cost commodity background check on an individual or entity.
Though these practices might save a client time and money up front and may appear to be sufficient, they are steeped in risk. When a company or individual investors are interested in acquiring another company or hiring a senior executive for a strategic position, the reputation and character of the entity and the key executive leadership should be a priority. Not knowing can have a devastating impact on financial performance – or worse – in the future.
War Stories: A Few Pre-transaction Fails and Near-disasters
I just asked a few of my colleagues in our investigations and due diligence practice to share one or two of the most salient examples of “fails” or near-misses in due diligence.
- One mid-market manufacturer investigating fraudulent invoices determined that it had been doing business with an individual who spent nearly 10 years in jail after his conviction for armed bank robbery.
- A professional sports player who entered into business with an acquaintance he met at the gym was surprised to find in a bankruptcy document that his new colleague had ties to the mob.
- An international energy and mining company on the verge of employing a new executive to lead core operations in remote regions of Asia and Africa scrapped their plans at the last minute when the only negative finding in an otherwise stellar due diligence report was the revelation of a sexual harassment case buried in a hard copy document erroneously filed in courthouse records.
Why is Reputation and Character Due Diligence Necessary?
Reputation and character due diligence identify a history of civil disputes, criminal records, questionable corporate governance, bankruptcies or claims by vendors or creditors for the entity and key executives. With the explosion of social media, how a company and individual represent themselves and their associated networks is crucial to any due diligence request. Not knowing the company’s and key executive leadership’s social media footprint can open up a web of complexity after a transaction that could so easily have been avoided. You’d be surprised at some of the things people post on their networks and the amount of information you can find just from someone’s Facebook page.
Bottom Line: It’s Not Just about Time and Money. It’s about Risk.
I recommend taking a risk-based approach to transaction costs. Taking due care and carrying through with a well-structured due diligence process reduces the potential for future litigation, executive termination and loss of business opportunity costs associated with a merger gone wrong.
So yes: Google Search is fast and free, but it only provides links to information, which may not be accurate, complete or up-to-date. And while Google is a good way to instantly find low cost background searches, when it comes to pre-transactional due diligence on reputation and character, checking a few boxes and getting a green light back falls far short of the assurance required to best minimize or eliminate future costs associated with the deal.
This blog is for informational purposes only and does not constitute a legal opinion or advice.