Due diligence – are you paying lip service or being thorough?

Failing to perform this vital business function can result in disaster for you and your business. In this short blog we examine what it is, and why it’s so important to get right first time.
 

The “what”…

Due diligence is a term used for a number of concepts, involving either an investigation of a business or person prior to signing a contract, whether that be commercial or employment, or an act requiring a certain standard of care.

The etymology of the word itself is taken from old French meaning “attention, care, haste, speed.” This in itself is of interest as it speaks clearly to what is expected by clients when this type of activity is undertaken.

Yet haste and speed seem to be somewhat at odds with attention and care. How often have you done something quickly that has had your full focus and attention to ensure all the details and minutiae are covered? Rarely, is likely the answer.

So simply put – due diligence is a detailed investigation. A process whereby the focus is to verify information and uncover any issues. When it comes to people that involves investigating their background information, skills, qualifications and accreditations.

For a company the investigation will look into its business data thoroughly to make a more informed decision on whether or not it has potential for acquisition or to engage it as a client or supplier.

Due diligence in relation to an initial public offering (IPO) or the merger and acquisition of a company is a daunting process. Usually there is an ocean of documentation to review, analyse and verify. Depending on the size of the company this can take a considerable amount of time to complete.

The “why”… 

On the face of it, that sounds simple and straightforward enough. However the key element here, which is often overlooked to some degree, is the ‘human factor’. Therefore, ultimately the most important aspect of due diligence  more often than not revolves around the people.

A good example to demonstrate this point is when a successful smaller company is acquired by a larger business. The financial due diligence is carried out by the accounts department who pour over the figures to ensure there are no hidden surprises and the business is performing as advised. The empirical accounting data suggests that the goodwill is there…great!

Is it though? The common error here is that the ‘how’ of success is overlooked. The figures will only tell you so much. The questions that need to be asked are, who drove the company forward? How did they do it? Most importantly are they staying and if not can they be replaced?

We often think of companies as living breathing entities. But they aren’t, they are legal formations or partnerships. What makes them so is the individuals that work within them. They make the day to day decisions and sometimes those decisions are wrong which can lead to catastrophe.

The best and most infamous example of this is the collapse of Barings Bank. The oldest British merchant bank based in London. This company was established in 1762 and ultimately undone by the activities of one man in 1995.

Even though Nick Leeson was demonised and bore the brunt of the blame in this instance in reality he wasn’t the only one at fault. There were a number of poor decisions made by individuals within the business that allowed him to continue unchecked until the inevitable conclusion.

The conclusion…

In summary, there are a number of acronyms used within industry that simplify what you must do when it comes to these activities, those being KYC (Know Your Customer/Client) and KYS (Know Your Supplier). But the one that must never be forgotten and is the sole focus standing head and shoulders above these when performing a due diligence investigation is simply, KTP (Know the People).

 

Martin Cartwright is head of Investigations at Proelium Law LLP.  Martin has over 20 years’ experience in investigations and investigative management having worked in both the public and private sectors. Martin holds a BA (Hons) in Applied Investigation and represents Proelium Law LLP on cases both in the UK and overseas in high risk jurisdictions as well as complex environments.

 

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