5 Tips for Being an Informed Due Diligence Consumer

The story, which has a few variations, goes something like this. Your company has been burning the midnight oil for six months now on a project to invest $300 million in a target company located in Eastern Europe. Your accountants have gone over the numbers 10 different times, you’ve visited their facilities, you’ve scoped the market and your lawyers have even drafted the term sheet. But there’s still one more thing you need to check off your list: the due diligence report. After all, you have to know who it is that you’re going to do business with, right? So you hire an expensive outside vendor to conduct the investigation, and they promise you that their on-the-ground investigators will leave no stone unturned. Six weeks go by and the deal seems more likely than ever to be signed, when suddenly you get a call from the investigators: “The report’s ready. You may want to sit down to hear this.”

How could this have happened? The company in which you were about to invest $300 million turns out to be run by a bunch of crooks! Allegations of embezzlement, fraud, corruption and theft abound. The CEO lied on their resumé. You’re disappointed. Crushed. But you’ve no choice but to kill the deal, right?
Wrong.

Too often, companies—at the expense of months of hard work—are misled into blindly trusting everything they read in a due diligence report without first using a bit of common sense. That’s not to say that there aren’t bad people out there that you shouldn’t do business with, just that due diligence, like so much else, is not a perfect science.

To be better attuned to some of the pitfalls in due diligence that can taint the accuracy of results, here are a few tips that you’ll want to use next time you’re reviewing a due diligence report:

1. Be aware of the sources and context of the allegations being made

Due diligence reports sometimes rely on open source material (e.g., press reports) that are unreliable. We all know that you can’t trust everything you read in the newspaper, but this is doubly true in countries with poor records of freedom of the press. In many countries, government officials and other elites who have an ax to grind with particular individuals in the private sector may exploit their control over the press to damage that person’s reputation unfairly. Many others can simply be bought.

2. Be aware of who’s actually authoring the report