Case studies:A private equity fund considering an investment in Sri Lanka"s tea plantation asked Kroll to investigate the park and its founders to make sure there was no history of fraud and that the operation was legal and ethical. When Kroll discovered that the tea plantation and the individuals involved did not exist, it concluded that the whole thing was a deliberate fraud.In a typical m&a transaction, investors generally push the due diligence process from three different perspectives :(1) the law; (2) finance; And (3) business background. There are many similarities between legal and financial due diligence - in particular, both are document intensive and rely on information provided by the target company. Business background due diligence differs from legal and financial due diligence in two very important respects - content and methodology.contentBusiness background due diligence combines public record research and informant interviews to find information about management background, bidding competitors, corporate reputation, ethical record, regulatory compliance, market conditions, hidden interests, environmental liability and other issues. The investigation also focused on efforts to identify important facts that were not disclosed to potential investors.methodologyThe intelligence gathered by investigative experts is independently obtained from public and proprietary sources, but the most important sources are informants. Discreet informant interviews are a critical and challenging part of business background due diligence. By carefully and subtly interviewing people familiar with the subjects of the survey with different backgrounds and identities, useful information can be obtained that cannot be found in the public domain. However, care must be taken to ensure that investigations are conducted in compliance with local privacy laws.The key to ensuring the best results from informant interviews is to wait until you have a good overview of the subject through desk work and public records research. The profile learned should lead to the necessary clues and potential sources of information, as well as appropriate questions to be asked.Intelligence obtained through due diligence on a business background can help or stop a deal. Experienced and successful investors place a high value on business background due diligence and do it early in the process before investing a lot of time and energy in a deal.
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