Investigative Due Diligence Continued

You must first make a decision whether you want to have the owner or the company investigated, or both. Our position will always be to allow us to investigate both.

The Owner Of The Company

If you are investing funds in a company, it is the owner(s) who will be responsible for how the funds are spent within the company.

What happens if the owner is in great financial difficulty? What if there are outstanding lawsuits, judgments, child support obligations and credit card debts?   Where do you honestly expect the invested funds to end up first?

The owner may have told his or her outstanding creditors that payment would be resolved once company financing is in place. This could suggest that much of the funds invested will go to paying off personal debts instead of using the funds to expand the company as proposed in the business plan.

In many cases where troubled companies are looking for capital, the owners have exhausted much of their personal reserves. You can expect that paying off personal debts will happen in most of these situations. It is important, however, to know just how bad the debt situation is. We need to get a rough idea just how much of the investor's money will actually make it into the company.

We also want to find out as much as possible about the past tactics of the owner.

• Have there been other companies owned by this individual that have gone bankrupt shortly after financing was obtained?
• Are there any old or current lawsuits against the owner or the company?
• Has the owner ever been bankrupt?
• Can this owner be trusted ?
•  What kind of person is he?
• Does he get on well with employees and managers?
• Is he a proven leader with vision?
• Has this person ever been written up in the media, a trade journal, or an industry publication? Was it a good or bad article ?
• Where does he live? What kind of car does he drive? How much money does he have in the bank? What is the status of the mortgage on his home?

In a recent fraud investigation, we investigated an owner who had obtained financing for his company and was deeply indebted to creditors. The owner did everything possible to get money out of the company and into his pocket. Numerous fictitious invoices and companies had been created by the owner. The owner wrote cheques to these companies which appeared on the books as nothing more than valid business expenditures. Thousands went into his pocket through one company name or another. It is the oldest trick in the book.

(Credit Searches, Criminal Records & The Law)

The Controversial Stuff  

Two very important investigations to conduct on the owner, in the background stage, are a credit search and a criminal record search.

The credit search is important because it will yield information about the balance on credit cards, collection matters, previous addresses, past employment, the works.

Credit Searches

The Fair Credit Reporting Act (USA), and the Consumer Reporting Act (CAN) make it illegal for anyone to conduct a credit search on an individual without their consent. This means that you will have to advise the owner that you wish to conduct a credit search on him or her or you will not invest. Just like applying for a loan, it is expected that a credit search will be conducted. It is best for you to draw up a simple written authorization and have the owner sign it. This is a very important search in the investigative due diligence process.

Criminal Record Searches

The law in regard to criminal record searches varies from state to state in the United States. In Canada it is not public record and so it is completely illegal for you to obtain a criminal record search on an individual without their consent.

If the owner resides in a location where criminal record information is not public record, you are going to have to instruct the owner to go out and obtain his or her own Certificate of Non-Conviction. How to obtain this document will vary from county to county. Inquiries will have to start at your local police division.

If an owner should refuse to give consent in these two areas, your alarm bells should start ringing. There may very well be a skeleton in the closet.

Unlike the employee and employer relationship, in most investment situations you have the right to refuse to invest for any reason; you may not even have to give a reason at all.