Due Diligence: Waiting One Week Could Save You Millions

Sometimes in business, there is a tendency to act now before an opportunity passes you by. Hire the candidate before they get away; commit $2 million to the syndicate by Friday or lose the deal.

What sometimes gets lost in the desperation is the calculation: How much will I lose by not making this deal this week, versus how much will I lose if I make the deal and it goes bad?

Consider two of the most successful investors ever: Warren Buffet and his late Vice-Chairman and good friend, Charlie Munger.

Buffet would rather lose a little upside by taking his time looking at a company than piling in full force right away. He sits on cash for years if he can’t see anything worth buying at the right price and the right risk level.

Munger famously said, “The big money is not in the buying and selling … but in the waiting.”

We have written before about how much money you can save by doing thorough, affordable due diligence on a person before going into business with him (paying $3,000 not to do a bad deal is better than saving $3,000 on due diligence and losing millions).

But we didn’t treat the issue of time versus money: There is certainly a cost to moving too quickly, but what is the cost of not moving immediately?

Sometimes, that cost isn’t that great because doing due diligence on a person – as opposed to a whole company’s books and records – can be done in as little time as a few days. We wrote about that here.

Consider these two recent case studies on matters we handled:

• The U.S. subsidiary of a foreign company found that its top two officials had made off with company funds. When they asked us to look into those people, we found that one of them had no reported fixed address (he supplied the company with the address of a mail drop). We also found that he had decades of federal tax liens and owed Uncle Sam hundreds of thousands of dollars. Time it took to find the tax liens: Two hours. Our bill for that part of the job was under $800.
• A client wanted to sell its receivables to a factor and had paid part of the deposit so that the factor could conduct due diligence on the accounts. The client asked the factor for references before paying the balance of the deposit, and the factor said those would come once he received the full deposit. We found that the factor had multiple judgment liens against him in several states, and had been alleged to have defaulted on two similar deposit arrangements being offered to our client. Time it took to find the red flags on the factor in three states: Four hours. Our bill for that job was under $1,400.

In both cases above, the client could have paid us and waited a few days before hiring or engaging, and would have been saved a lot of headaches – financial and time consuming.

We all want only the best for our businesses. In most cases, waiting an extra few hours or days can pay enormous benefits.

As Charlie Munger also said, “It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.”