• Home
• Overview
• Management Team
• Markets Served

  • Financial Markets
  • Professional Services Markets
  • Pre-Employment
• Products & Services

  • Financial Markets
    • Risk Profile Report
    • Professional Tracking Report
    • Asset Recovery Report
    • Due-Diligence Consulting
    • Litigation Support
  • Professional Services Markets
  • Pre-Employment
• Order Instructions
• Press Room

  • Articles
  • Press Releases
• Case Studies
• Contact Us

about the borrower, the management team, the collateral or the financial representations made by management can be costly in many other ways as well.  Most significant is the opportunity cost of continuing to chase a dead horse or the potential litigation that might arise on a failure to fund or breach of contract claim brought by the prospect.  This likelihood can increase with each passing day.  Consider the following example.

A deal killer:  The CEO of a U.S. public company was found to have been under investigation for securities fraud in Canada because of allegations during his tenure as CEO of a Canadian public company prior to being hired by the lender’s prospect.  A disclosure of the allegations pending was not made by the subject to the directors of the U.S. company or the agent lender considering the loan request.  The deal was killed by the lender and the CEO was fired by the prospect’s board of directors.  The subject was subsequently convicted of securities fraud in Toronto.

The due-diligence process – a refresher and a little more

Broadly speaking, in addition to management interviews and site visits by the lender, the due-diligence process often includes the outsourcing of the following key components:

1. Background investigations, including the borrowing entity and the management team.

2. Financial statement analysis, including audits and field examinations.

3. Collateral evaluations, including appraisals of personal and real property.

4. Legal review of corporate fitness and legitimacy.

Background investigations top the list for good reason.  If a critical assumption about the background of the company and/or the management team is incorrect or fraudulent, why continue with the remainder of the due diligence?  Why spend deposit dollars on audits or field exams, appraisals and legal fees if something about the background investigations proves to be a deal killer?  A misrepresentation or lie cannot be overcome with an abundance of collateral or excess cash flow.  False hope about the character of the company or its management team in the face of contradictory facts is fool’s gold.  

Lenders in record numbers today are requiring background investigations as an integral part of their early due-diligence effort.  But are they getting enough bang for their buck?  That depends in large measure upon the methodology employed by the company performing the background investigations. 

The rules of the game – best “process” practices

Rule #1:  Be sure the process being used is the best one, the most thorough one.  A flawed process will have a flawed result most of the time.

Rule #2:  Use the best process every time.  Deviating from what works best for the sake of time or money will result in a questionable outcome.  It’s a good bet that, if you manage this part of the process by exception, then you will be compromised exceptionally.

Rule #3:  The best information comes from the best process.  Quality trumps all else in the background investigations’ game.   

Rule #4:  Redundancy is required.  Redundancy in the process always leads to the best results.

Another deal killer:  The CEO of a U.S. public company was found to have a felony record for killing an endangered species in a public park.  It seems that he was an aspiring member of a “closet” militia group that required such an action in order to pass the hazing requirements for membership.  He failed the militia group’s membership test and the background investigation test.  The lender backed away from the deal and the CEO lost his job. 

The processing requirements – best “business” practices

Given the dollars invested and the level of risk taken in a typical asset-based loan, short circuiting the following background investigations’ processing requirements is an unwise policy. 

Requirement #1:  The process must include a thorough research effort in locating all of the jurisdictions (counties) in which the subject has resided or done business during the period of time being investigated.  This is accomplished using a variety of public record research tools.  

Requirement #2:  Research into the background of the subject must then be performed in every jurisdiction where it has been determined that he/she/it has been located in #1 above.  No exceptions.  To except even one jurisdiction could be fatal because this might be where the deal-killer issue resides. 

Requirement #3:  The investigation must include “on-line” and “on-site” research into the background of the subject(s).  No exceptions.  Reliance upon on-line database searches alone is a fatal flaw in the process.  We find adverse public record information regarding civil or criminal litigation histories, judgments, tax liens and bankruptcies in 30 percent of the cases as a result of performing on-site research that we didn’t find on-line, using the best databases available.  This is a percentage too high to ignore.  It is advisable to use at least two on-line databases to search for each of the above categories of public record information.  

Requirement #4:  The on-site research must be performed independent of the results of the on-line research.  This must be done every time.  No exceptions.  To perform on-site research to only verify the efforts of the on-line research is not the same as performing independent research. 

A final deal killer:  The CEO of a private company was convicted of having sexually assaulted and abused his then four-year-old daughter 12 years earlier.  This happened before his current marriage, new fatherhood and growth of a new business in a different corner of the country.  Our client, who had met with its prospect and his current wife/business partner/investor numerous times, is convinced that his wife was unaware of his past crimes.  The lender walked away from the deal. 

Finding a deal killer through a background investigation is a matter of recognizing and always following the best process.  Due diligence performed correctly is a lender’s best assurance of the best outcome.  

Jerry Oldham is co-founder, chairman & CEO of 1stWEST Financial Corporation, Evergreen, CO. Mr. Oldham has a broad senior management background in banking, corporate and real estate finance. He is on the Governing Board of the CFA Educaton Foundation. He can be contacted at j.oldham@1stwest.com.