One of the largest business brokerage companies in the US, Transworld Business Advisors, estimates that some 50% of deals fail during due diligence investigations. This implies that both sides of a potential merger and acquisition (M&A) process thoroughly inspect each other before buying or selling.
Likewise, we have all heard terrifying stories of new owners shocked by multiple problems upon buying a company. The reason is that many still don't consider it worthwhile to examine the business they are buying in advance. As a result, some of the following issues can arise:
- Lawsuits between the former owner and the current owner,
- Buyer loses vast portions of their investment,
- Seller forfeits financing they may have extended,
- Business runs to the ground or declines rapidly.
The new company owner could have averted all these problems if they had only conducted a due diligence investigation. Doing so would have allowed them to learn all the details of the firm's operations upfront.
In truth, most sellers don't want to rip off prospective buyers. It's just that they don't always know what they should tell the buyer. In other cases, buyers need to know which questions to ask and in how much depth.
At any rate, in the merger and acquisition process, trust is paramount. If either side doesn't trust the other, a deal is set to be ruined. But nowadays, in the business world, distrust is running amok. Thus, we advise conducting due diligence investigations to assuage any concerns.
Before we get into gathering intelligence, let's see which sectors typically make use of this instrument.
Countless Applications for Due Diligence Investigations
Due diligence is an investigation that isn't restricted to a single field. In fact, it can apply to different areas, including:
- Family offices, and
In the world of legal proceedings, attorneys can typically never rely on their client's internal documentation to see if they meet specific criteria. As a result, they must interview employees and understand all of a company's obligations, such as:
- Pending and potential lawsuits,
- Contracts, etc.
In a corporate setting, a due diligence investigation can mean doing a background check on the new company's employees to ensure they don't pose a risk or a liability.
As for the realm of family offices, a report by the Family Office Real Estate Magazine states that 79% — of 102 family offices polled — conduct due diligence internally instead of outsourcing it. In addition, many family offices lack a complete understanding of the depth of due diligence needed for property investments.
Finally, an insurance company benefits from a due diligence investigation in the sense that it can
- Review and analyze the business profile to identify risks,
- Obtain relevant insurance policies,
- Benchmark against peers in the relevant industry,
- Identify and analyze pending claims, and
- Assess risk management for future claims.
However, this is only a short list of the benefits.
Intelligence Considerations for UHNW Individuals
Many wealthy and prominent individuals avoid conducting a due diligence investigation because they think they are smart enough to spot issues themselves. In other words, that no outsider should tell them what to do.
Firstly, no single individual has all the information they need to protect their current or future company from incurred debt or other liabilities. Thus, getting over one's ego may be the first and most crucial step in this process.
Secondly, some UHNW individuals may not want to offend those they are doing business with by seeming not to trust them. Yet, this doesn't prevent manipulators and scammers from exploiting it to the maximum.
Thirdly, when doing business outside rich and developed countries, it's advisable to conduct due diligence investigations for several reasons. And some of these less stable geographies include:
- Latin America,
- Africa, and
- Eastern Europe.
Suppose you are set to invest heavily in a company, the business perspective of which seems promising. Naturally, you want to start investing immediately. But after giving it a second thought, you subject it to a due diligence process.
In the course of the investigation, you learn that the land where the company is located has been undergoing a legal dispute with the rightful landowners. In fact, the buying entity's locally contracted attorney had only wanted to lure in potential investors — their employer — to invest a decent sum and then walk away.
Therefore, intelligence gathering can make all the difference for ultra-high-net-worth and businesspeople. That is, if only they make an effort to think about what could go wrong.
Who to Trust?
Believing that lawyers will work in the best interest of their employer doesn't always make sense. Especially in the less regulated parts of the world, where a corrupt court system will likely produce little to no results if the affected party decides to sue them.
A rule of thumb here would be not to trust anybody just because they purport to have your best interest in mind.
So even if a friend or an associate introduces you to someone stating they want to do business with you, we suggest not doing it until you inspect them thoroughly. Whether that may be by employing a background check or assessing their financial standing.
Whatever the propositions, it's always wise to do a criminal and civil history check on a business partner to bypass future crises.
And if trust is lacking, then you may experience trouble farther down the road. So to fix the issue of distrust before it arises, we suggest conducting due diligence investigations. You can do this in several sectors, including:
- Family office, and
To avoid dealing with unexpected debts, liabilities, or disgruntled employees, we recommend engaging a team of experienced professionals in this field to assuage any concerns you might have before the next M&A or substantial investment.
Bedrock Special Projects provides peace of mind by implementing due diligence investigations to benefit prominent individuals, their families, and corporations. The Art of Executive Protection – Delivered with Elegance by Design.
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