Why physical research is key for a due diligence process
A due diligence on a potential business partner is a crucial step for any executive appointment, partnership or merger & acquisition. To conduct a solid due diligence, Nick Whetherly, managing director of intelligence firm Pelican Worldwide, recommends picking up the phone or stepping foot outside of the office.
The world is at your fingertips. It’s tempting to think every piece of information can be found online these days and is just a few clicks away. Want to know about a business, an individual, a product, a service? The information you want is surely out there somewhere on the web. Let’s be honest: internet research is free, quick and convenient. If you are conducting due diligence, or a background check of any kind, wouldn’t you want to start your research like this?
This is all well and good, but problems will arise if a business relies exclusively on online searches for its due diligence. Doing this risks creating issues further down the line, especially if it’s a strategic undertaking such as a merger or acquisition, or bringing in a major new investor or even hiring a new senior member of staff.
In our experience, businesses are often tempted to ignore the value associated with engaging professional due diligence consultancies and take it on themselves. The main driver for this is often associated with saving costs. After all, many of these businesses will be run by tech-savvy individuals who believe they know their way around the internet and will be confident at extracting relevant and accurate information.
However, the free availability of information online does not guarantee that it is comprehensive and reliable, which is the essence of professional due diligence. For example, Googling alone won’t reveal the difficult-to-find facts about an individual’s career track record and reputation. Nor about the quality of their business decisions or past associations, good or bad.
Moreover, Googling won’t reveal the nuances of a company’s ownership structure or its litigation history, both of which require specialist searches and a degree of expertise to interpret the findings. The fact is most online searches will only produce results the search engines have found and indexed. In almost every case, this won’t be nearly enough to satisfy the requirements of comprehensive due diligence.
Due Diligence: more than just Googling
Information is intrinsically valuable. Therefore, by default some will not be freely available via a typical search engine and will require a fee or subscription to read it. Media archives and litigation records for example are held on specialist databases which require subscription fees.
Some information, depending on the jurisdiction, may not have even been digitised. Examples of this include ownership records of an overseas entity, usually registered in exotic jurisdictions.
In such circumstances information may often only be obtained by approaching the actual registries, which keep records such as corporate documentation, property ownership and archived court papers, and by speaking to a local administrator who is able to submit the relevant searches because of their expert knowledge and ability to navigate this process.
A part of the problem when embarking on due diligence is that in the internet age we are used to instant gratification and are habituated to same-day services. We are all guilty of it.
But in the end there are no short cuts to conducting quality due diligence. Thorough information extraction simply takes time. One of the most time-consuming processes is obtaining copies of professional qualifications or academic awards. It’s an intrinsically slow process because it requires a certain degree of human involvement, which usually boils down to speaking in person to a clerk or administrator.
In addition to the time it takes, thorough due diligence requires careful sifting through documents and then analysis of this information. It can take up to 15 working days to collate and verify information for a due diligence report. In all cases, the information will be sensibly presented, often in a written report, to enable the client to interpret the results and understand any if there are any potential risks. Even then there might still be gaps, but these are flagged in order to be fully transparent. The relationship with the client is as important as the research itself. Trust and reliability are key ingredients.
“Due diligence is an essential process which also requires a human element to provide deeper context and the right filtering.”
True? Still relevant?
Assessing and filtering media coverage can be particularly time consuming. We live in an age that’s seen the rise of ‘fake news’, which seeks to distort a particular issue, usually for political aims. Just because information is supplied by a third-party source such as a newspaper or journal does not mean it is any good. Some articles have clearly not been subjected to rigorous fact checking.
Another issue is that search engines bring up results that are simply outdated. The applicability and validity of information will therefore require verification – and yes, may often mean reverting back to phones or paper files.
At Pelican, we are often approached by investors to conduct due diligence on directors ahead of deals. Within the property sector, for example, it is typical to establish if companies have been set up for a specific venture. The directors and investors in these deals very often have little or no previous experience of working together and have been assembled for the first time as a consortium for the new project.
An important encounter
This exact scenario applied to an Australian property deal where we were acting on behalf of potential investors who wanted to know more about the directors. This was particularly important because as a brand-new venture, there were no historic company accounts or trading track record to review.
Throughout our research, it soon became apparent that one of the directors had a string of liens and a county court judgement against his name. Another of the directors was less troubling on paper but was involved in a considerable number of other businesses which raised questions over the amount of time he could afford to spend on the new venture, and another director was involved in such a large number of lawsuits he would never have found any time to devote to the newco.
But what clinched our client’s decision not to invest in the consortium was made only after we had actually visited in person the business address one of the directors. His office was sited in a shabby building in a less-than-salubrious part of town, and the brass plaque bearing his company’s name was literally hanging by a single screw. It told a powerful story that no Google search would have revealed, and the would-be investors decided to back out at this point.
The moral of this piece is that so much more can be discovered by getting away from our screens. Due diligence is at its most valuable when it commands sufficient time and resources. It is an-active and essential process which often requires a human element to provide deeper context and the right filtering, which comes with expertise gained over many years of information retrieval. The fact of the matter is that in the internet age it often pays to slow down and get it right at the beginning. Rushing the process often leads to gaps in the process and unnecessary mistakes.
