Saving Money on Due Diligence: Look at the People First, Not Last
You are the Chief Investment Officer screening possible targets for a $5 million investment in a non-public asset. Whether you work at a family office, a private equity fund or somewhere else, the prospective deal flow should be coming at you good and hard.
If you are not seeing a flood of potential investment targets, you probably aren’t seeing enough. Last month at a gathering for family offices at UBS, one veteran, Mike Ryan of Bullet Point Network, told the assembly that if you aren’t looking at 100 deals for every one you take, you aren’t getting enough of a selection that will let you outperform your peers.[1]
[1] He also said you should always ask yourself, “Why am I being shown this particular deal?” Why now?
Maybe you can knock 50 or 60 of the deals out at first blush. But say later on you have five that are serious candidates for a $5 million investment. You and your money would be getting married to the founders/main shareholders, probably for five years until you can exit.
You will have to do the business valuation no matter what. You will need to figure out the rate of return on your money, and factor in various risks: competitive, regulatory, macro-economic, and so on. That can all cost quite a bit if done right.
But say the business looks pretty good. Now, you just need to make sure you’re not getting into a business marriage with a toxic individual. Someone who presents well and seems to have a solid business, but who ends up in litigation with most of his business partners. Oh, and maybe he oversold his past successes on his website and LinkedIn profile (submitted by the account holder and almost never fact checked by LinkedIn itself).
We have found all kinds of strange things out about prospective business partners:
- A probably invented computer science degree.
- A propensity to be traveling all the time (posing on camels and in rugged Icelandic scenery instead of running the business).
- A weird obsession with suing his car’s manufacturer without a lawyer and over damages in low thousands, despite his being behind “billions” in past property deals. What high roller can’t just hire a lawyer for something like this? Someone who can’t afford a lawyer but wants your $5 million?
- A prospective investee was accused by two other partners of pilfering their brands. He was fighting them both in court in active cases that we retrieved. Our client was thinking of doing a brand-sharing deal with this person, but wisely reconsidered.
None of the findings immediately above cost our clients more than $3,500 and more than ten days to track down.
You can spend the $3,500 first and knock bad eggs out of the basket, or you can wait until you’ve gone over the business and spent much more than that in time and money.
It’s your money (or that of your employers). Spend it wisely.
Want to know more about how we work? Our website has a wide range of publications and videos. You can also read my book, The Art of Fact Investigation which is available at bookstores online and for order from independent book sellers. And check out our other blog, The Divorce Asset Hunter.
