Informed decision making is the backbone of intelligent business practices.

After the stock market crash of 1929, many in America began to recognize the gaping hole in the information about the businesses in which they’ve been investing. Enter the Securities Act of 1933 which would hold accountable the securities dealers and brokers to fully disclose all available information. This facilitated transparency and helped to stop the distribution of false information. If any were caught withholding or falsifying information, they were held accountable and could be criminally prosecuted.

Business could no longer be conducted on faith and handshakes, and due diligence was the solution.

What is Due Diligence?

Due diligence is now considered standard practice in the corporate setting. Most often used for the vetting process of potential vendors, contractors, executives, business partners, it’s also expected during mergers & acquisitions.

Due diligence serves to verify the facts as they’ve been presented, to eliminate risks before crucial decisions are made. It’s used in the evaluation of a business before deciding to purchase and while it can protect both parties, its primary purpose is to protect the purchaser as it can uncover any potential liabilities and financial matters and ensures nothing is being hidden.

While not all information is intentionally hidden, mere negligence and incompetence can be just as costly if not brought to light. A thorough due diligence investigation can uncover:

• Employment history misrepresentations and falsified degree information

• Criminal history

• History of litigiousness

• Legal accusations such as harassment or fraud

• Regulatory issues

• Financial troubles, including tax liens, bankruptcies, and foreclosures

• Undisclosed business affiliations, government scrutiny or a trail of failed businesses

You can perform a due diligence investigation on any facet of business that you consider necessary. These are the more common reasons:

• Financial – to evaluate past annual and quarterly financials. Including:

  • Income and cash flow statements and balance sheets

  • Sales and profits by product

  • Inventory

  • Assets

  • Projections

  • Debts and liabilities

• Taxes - to determine all the tax jurisdictions the company might be responsible for, and any other taxes which could be assessed domestically, internationally. This would include non-income-based taxes, like sales, property taxes and employment.

• Legal - to assess and understand legal risks. Is a business involved in any legal investigations, or are there potential future issues? What contracts are they subject to?

  • Leases

  • Articles of incorporation

  • Business registration documents

  • Purchase agreements

  • Sales contracts

  • Employee and contractor agreements

  • Distribution agreements

  • Trademarks, copyrights, trade secrets, and patents

• Commercial – to analyze competitive positioning and the market environment for potential impact on a business plan.

• Intellectual - to assess both the quantity and quality of any intellectual property assets and help assign investment value.

• Operational – to lay out the core operations of a company, including:

  • The business plan

  • Engineering and manufacturing operations

  • Supply chain

  • Risks and expenditures.

  • Market analysis

  • Public perception

  • Competition

It also reveals any:  oversights, governance, and compliance under which the company must operate. Departments such as human resources and IT can fall under this, for example, which software platform to use after combining two companies, and which employees to retain in case of overlap.

Due Diligence Investigation on C-Level Executives

Many companies have begun to require an integrity due diligence investigation on its c-level executives before any major promotions and have also found due diligence investigations useful for reasons beyond mergers and acquisitions. Conducting corporate intelligence investigations are chief among them. These investigations gather and analyze information for use about customers, products, competitors, etc. before making strategic decisions. The objectives are much the same: risk reduction, corporate problem solving, and new market intelligence. Competitive research along with market research, for example, are useful for developing sales strategies and for positioning a company against market competitors.

Do corporations conduct their own investigations?

Sometimes they do, or at least portions of it. Most companies don’t employ personnel with the necessary resources and experience.

Quite often companies will use private investigators for these investigations to ensure not only a thorough investigation but also that they operate in good faith. A private investigator will possess the precise research and surveillance skills needed to conduct due diligence investigations, and they will have the experience to limit investigations to specific objectives by:

• Researching public files, and databases. Some private investigators will have access to specialized databases that enable them to generate a company credit report.

• Performing surveillance, including computer forensics. They will have experience in asset searches to help determine a company’s real value.

• Conducting exhaustive background checks on entities you might enter into business with, or for help making decisions when there are overlaps of employees in the same role.

Potential Effects of Forgoing Due Diligence

Failing to conduct due diligence could place the security and longevity of a business in jeopardy. A new partner, executive or employee can embezzle funds in a way that recovery is not possible. Alternatively, they may steal secrets that place intellectual property at risk. Bad investments can be made, creating a financial situation from which it may be difficult, or even impossible to recover.

Courts have been known to dismiss some complaints when the opportunity to conduct due diligence existed but was ignored. Judges expect business entities to have performed an appropriate risk appraisal when information could have been available and uncovered through a due diligence inquiry.

There have been embarrassing accounts of high-profile companies hiring individuals into executive positions with questionable backgrounds that would have been easily uncovered with a simple investigation. When the public hears a company hired someone that falsified their education or employment history or hid a criminal record, they may question the competence of that company, which can ultimately damage its reputation and bottom line.

Due Diligence Conducted by a Third Party Professional Shouldn’t Be Less Than Your Standard Practice.

In today’s ever-evolving business world, corporations unceasingly find themselves engaged in complex transactions, including mergers, acquisitions, corporate financial restructuring, lending arrangements, joint ventures, and hiring key executives which require the disclosure and verification of information by one or more parties. When such disclosures are inaccurate, misleading, incomplete, or inadequate the transaction and your business could suffer.

Due diligence is necessary for informed business decisions and compliance with government regulations. Decision makers require comprehensive and timely investigations to verify the information presented by individuals, companies and lending sources. Hiring a third-party investigator will assure the information on which decisions are made is accurate and thorough.