A thermometer with mercury bursting through the glass, and the words Confidence Level, symbolizing a positive attitude

A thermometer with mercury bursting through the glass, and the words Confidence Level, symbolizing a positive attitude

In these challenging financial times, we’ve received a lot of requests to “find the money.” Investments were made in promising enterprises that failed. Now the lawyers are called in to survey the damages and recover what they can. Often, there is nothing to find. Invested money has been lost due to a combination of overhead, bad timing, loss of credit lines, shrinking market share, mismanagement, or just plain foolishness.

There’s no way around it, business is a risk. However, risk can be mitigated by excellent market research, sound management, a well prepared (and flexible) business plan, and access to both capital and credit. Risk cannot be mitigated merely by believing in a great proposal, a hunch, personal experience, or a smooth presentation. This is the arena of speculation, not investment, and a place of pitfalls, broken promises, and probable litigation.

Black’s Law Dictionary defines due diligence as, “Such a measure of prudence, activity, or assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent man under the particular circumstances; not measured by any absolute standard, but depending on the relative facts of the special case.”

So, what constitutes due diligence in your market? Is it running a database report to determine if the subject has any tangible assets, like real estate, automobiles, boats, or planes? Is it checking the local courthouse to identify liens, judgments, or pending lawsuits? Does due diligence involve conducting surveillance to determine where the subject actually works or lives or contacting former employers or creditors to determine the subject’s credit worthiness or past payment history?

The fact is that “due diligence” investigations may or may not require one or more of the above strategies because a real due diligence investigation is determined by the specific factors of a case.

For instance, if you were to loan your car to your teenage son for the evening, your due diligence might consist of checking the status of his homework or his report card and confirming his intended location for the evening. Or if you were asked by your sister for a thousand dollars to bail her husband out of jail after he was arrested for DUI, your due diligence might consist of verifying that the besotted husband would still be employed after his release and determining the proximity of the local AA meetings in his vicinity.

In other words, the scope of the due diligence you are conducting is determined by the significance of the risk you are underwriting. Underwriting or financing a multi-million dollar development project obviously requires more extensive research and analysis than issuing an unsecured credit card or an equity line. For the latter, a simple credit report or an electronic appraisal will probably suffice as due diligence. For the former, an in-depth analysis might include the following:

  • a check of the applicant’s litigation history;
  • verification of previous financing packages
  • interviews of former partners, associates, or underwriters
  • personal visit to the applicant’s place of business to confirm its existence, location and type (private mail box/drop or actual office with staff)
  • database reports to identify any possible holdings or corporations in other jurisdictions or states
  • criminal history
  • verification of education or certification

At Complete Legal Investigations, Inc., we understand that due diligence is far more than running a simple database report, and there can be no “cookie-cutter” due diligence investigations.

Some investigations require overseas involvement, where a local investigator will physically determine the existence of a business or an asset. Many investigations require documents from courthouses in other states or counties. National database reports are valuable as an investigative tool, providing leads to information, which must be verified by investigation. These reports must never be substituted for actual research, as their content can be completely erroneous or out-of-date.

Bank account information is not necessarily available to investigators, but in certain cases, a lender may have secured a release from the applicant, allowing account information to be gathered that might otherwise be inaccessible. Even without a release, however, it is possible to establish a person’s net worth, using lifestyle analysis and other sources to derive an accurate figure.

Business valuations can be conducted by a forensic accountant or other specialists for potential mergers or acquisitions. Investors and principals can be checked, too, since a business is only as good as the people who own and operate it. Keep in mind this simple truth: “It’s better to be in a bad deal with good people, than in a good deal with bad people.”

If your company or financial institution is considering a large investment, loan, or acquisition, let the experts at Complete Legal Investigations, Inc. help you find the information you need to make the critical decisions confronting you. Call us at 561-687-8381.