Due Diligence

“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.”¹

Some may be under the impression that what constitutes a “due diligence” investigation is running a database report to determine if the subject has any tangible assets, like real estate, automobiles, boats or planes; checking the local courthouse to identify liens, judgments, or pending lawsuits; 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—that’s because a real due diligence investigation is determined by factors that differ from one case to the next.

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. In the first example, your investigation might establish that your son had, in fact, completed his homework and was, in fact, on the honor roll for the first time since fifth grade. In the second example, your investigation might have disclosed that this was, in fact, your brother-in-law’s third arrest for DUI, and that the facility he was incarcerated in offered several AA meetings a week—convenient for him and no risk for you.

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. We know that financial investigations to offset risk are structured by the specific objectives of the lender, on a case-by-case basis. There are no two cases which are identical, no “cookie-cutter” due diligence investigations that will fit into a boilerplate report.

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 principles 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 determine where to find the information you need to make the critical decisions confronting you.

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¹Henry Campbell Black, MA, Black’s Law Dictionary, West Publishing Company, Sixth Edition 1990, p. 457