Due Diligence

Something you are going to hear a lot in the future, is the term, Due Diligence. Some of you may know what this is. Some of you THINK you know what this is. My goal is expand your idea of what Due Diligence is and what it can do for you in a very short period of time. I also want you to get an understanding of how Due Diligence is an important part of any business decision.

The Miriam Webster dictionary defines Due Diligence:

Main Entry: due diligence
Function: noun
: the care that a reasonable person exercises under the circumstances to avoid harm to other persons or their property

While due diligence is a fairly new term for business, meaning it is not a common term in every day lingo, much less something that people always practice, I became curious as to when due diligence actually began .

The first practical example of Due Diligence that I could find comes in a form you don't quite expect. It also is a dramatic exhibit of how our societal mores and needs have changed so this is why I bring this up. But I wanted to show you something a bit extreme to get you out of the box, thinking Due Diligence is all about crunching the numbers and looking at the finances of a business arrangement. It is not. In the 15th Century the first written evidence of a Due Diligences effort was recorded by Keyser von Eichstad, a retired solider who compiled a manuscript in 1405 about the art of war and military equipment, in his book "Bellifortis". IN this book he included a drawing , and on this drawing was the inscription "Est florentinarum hoc bracile dominarum ferreum et durum ab antea sit reseratum" ("breeches of hard Florentine iron that are closed at the front"). If you havent' guessed what I am talking about, who would like to hazard a guess.

What I have just described for you the first record of the chastity belt.
During this time, it was assumed that your property was under attack and all property was the spoils of the winner. The average mentality was "What is not protected will be lost." What was being protected was not just the physical well being of the women of the kingdom, but the actual heritage of the gene pool. So along with the efforts of protect and avoid harm, we see the intent was to also perpetuate the heritage and the legacy.

Now, if we jump forward to today, at this moment, our standards have changed quite a bit. Or have they? We have investment programs, 401k's, financial plans. Most of you have visions that you want to become reality. And usually these realities entail something that can be bought or sold or even an enduring endeavor to be passed along to your children. So isn't this again, perpetuating the heritage and the legacy?

However, what has changed is our demeanor and attitudes that are engaged in this effort we call Due Diligence. Now remember, Due Diligence is nothing more than the care that a reasonable person exercises under the circumstances to avoid harm to other persons or their property.

So when building your vision, which in turn is just the practical matter of building a business plan, what efforts have you taken to avoid harm to other persons and their property.

Now while you are answering this, you will be including yourself in the definitions of persons. And you will also be including your property in this definition as well.

In our more developed society, our attitudes have grown from the "rape and pillage" business example to that of one "we can cooperate and prosper". Cooperation does NOT mean however, that you loose your ability to think and ask questions before making a decision. Cooperation is also not a substitute for the word trust. You can trust someone but choose not to cooperate with them or you can choose to cooperate with someone while not having a complete trust in them and/or their abilities.

Sharing a cooperative spirit also does not mean that everyone who is like minded in their business strategies and outlook is a good match for your business or that you are a good match for theirs. There is more to a good match than someone who thinks like you do or has a clear background, free of negative records. And there are times when someone may have a very smudged background and still be the right person for the position you are looking to fill.

So in our kinder, more highly developed, sophisticated business models, we actually have created a new set of obstacles. How do I get the information I need to make a sound business decision? Now this is really an issue for some of you because of a possible lack of experience. You may not know what information you need or why you need it.

Peter F. Drucker
A Meeting of the Minds
CIO Magazine, Sept. 15, 1997
"I [never met] the senior manager who knew what information was available for decisions. Very few senior executives have asked the question, "What information do I need to do my job?" In part because they've all been brought up with the accounting information that they understand. But the other type of information system, they don't understand."

So many times, people know what they need in a specific area because that is where their training or experience is. But how many of us really know every detail needed for every job that makes up the company we are here to build?

What I have found in my business experience though that is the biggest hindrance, is that people are UNCOMFORTABLE in asking for information from others, for fear of OFFENDING THEM! And the reverse of that problem is that sometimes people give away TOO much information in an effort to appear a team player or to show they are cooperating.

Now I am going to give you some examples of question that you want answered when you are doing business and I just want you to make a note if asking that questions would make you comfortable or uncomfortable.

1. Are you financially sound?
2. Now ask it the question this way – have you filed bankruptcy in the past ten years and do you have enough money in the bank to pay your bills for the next 6 months?
3. Have you ever been arrested?
4. Why?
5. What type of business are your close relatives involved in?
6. What type of neighborhood do you live in? What is the estimated worth of your home?
7. How many vehicles do you own?
8. Are they paid for?
9. Have you been sued or sued anyone? What was the suit about?
10. What kind of records does your local police dept have about you? (This involves non criminal charges that were not filed.)
11. What do your neighbors think about you?
12. What kind of person do you think you are – what are your strong suits? What are your weaknesses?
13. What kind of driver are you? How many accidents have you been involved in?
14. What are your hobbies and what kind of expense is involved in them?
15. Have you ever had another name or SS#? If yes, then why?

IF you were able to say you were comfortable asking these type of questions, I bet you are doing some form of due diligence in every relationship you have. If you are not comfortable, with these, I think you can see that you might have missed some important details during your decision making process, unless you had hired someone to perform this type of research for you.



What does Due Diligence Involve for most Companies?

Due diligence involves a detailed research into a company and its plans. It involves the advisor checking out:

The business's identity - how it is owned and constituted and what changes will be necessary prior to taking the company to the market, if it is a new start up.

The business's financial health, usually based upon a detailed examination of past financial statements and an analysis of the existing asset base. This includes verification of contracts, custom lists and potential contracts and marketing strategies.

The credibility of the business's owners, directors and senior managers - including validation of the career histories of all the main players in the business is a necessity.

The future potential of the business, reflected in the strengths of its products and the probability of earnings growth over the medium- to long-term.

An assessment of the risk involved in your business, in terms of your markets, your strategy and likely future events.
Your company's business plan, in terms of how realistic it is, how solid are the assumptions used and how well it conveys your business's potential.

Due Diligence of an individual includes much of the same thing:
An Individuals’ Identity - Verifying the person is who they say they are. A background includes confirming basic identifying information such as name and SS#.

An individual’s financial health, can include litigation records, UCC filings, liens and bankruptcies and credit history.

An individual’s credibility – Criminal records, verification of past employment and business relationships, education and activities in the community help establish if this person is the right choice for the position you are considering them for.

An assessment of the risk involved in your business based upon an individual, can be further analyzed by doing just that, assessing the individual with an in depth assessment profile.
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Reasons for Due Diligence: To prevent any unnecessary surprises while conducting business!

1. Business relationships with new clients or investors. (By both parties)
2. Past land usage of real estate acquisitions – (Pollution tort cases)
3. Public information about your competitors.
4. Use of patented processes/equipment.
5. Trade mark verification or prevention of potential theft
6. Intellectual property theft/usage.
7. Pre-employment background checks
8. Product liability defense.
9. Collection processes
10. Civil/Criminal defense research for the benefit of company or officer



What you want to know is:
Can the person do what is required of them?
What can they add to my organization that I do not have already?
Can they be trusted? Do they have integrity?
Am I proud to be affiliated with them or would it damage my reputation or cause me embarrassment or even shame?
Do I trust this person yet?
Do I respect them at least?
Do I like them or is that even necessary for me to have a business relationship with them?

And finally, before hiring any investigative or consulting business to help you gather this kind of information, make sure you know their history, background and credentials. Sometimes, how and where you got your information is just as important as to what information you gathered.

Feel free to respond or if you have any questions, call me at 972 485 4748.