Before validating a strategic project such as an acquisition, the “due diligence” phasis is most of the times realized by audit and consulting firms. A private investigator may provide additional skills, for instance on the ethics part of the mission.
Due diligence investigations are done before a company validates a strategic decision. They are often linked to an acquisition, but they can also precede other types of transactions: a joint-venture, the entry of a new associate, a business partnership or a sponsoring agreement.
The objective of the due diligence is simple: prevent risks and get the most complete view of the target company before taking the strategic decision. It involves prior checks done by experts, normally with the collaboration of the target company.
The main pillars of due diligence
In order to prevent the risks efficiently, the due diligence should obviously target the company itself but also its overall environment. However due diligence is often done mainly on a financial and tax perspective.
The main pillars of a due diligence mission are the following:
- financial audit of the company, checking its profitability and its compliance with accounting standards. The financial audit is also necessary to determine the company valuation. This part of the due diligence is generally done by an audit company.
- marketing analysis, evaluating the company market share and its growth potential. This is the field of Sales and Marketing departments within the company, or external consultants in Strategy and M&A (merger & acquisition);
- a legal audit, listing the on-going disputes and their risks on the future;
- the macro-economic and political environment of the target company, especially in an international project;
- for an industrial project, the reliability of the production facilities, and the valuation of the investments needed;
- the ethics part: do the target company and its managers behave in line with the ethics standards of the investors?
The ethics approach of due diligence: necessary, but above all a legal obligation
In many cases the ethics part is still secondary for the companies while doing due diligence investigations. It helps however, like the other pillars, to prevent important risks and may impact the final decision regarding a strategic investment.
Beyond its importance, french companies must perform appropriate checks regarding the ethics compliance of their partners. The law called “Sapin 2”, implemented in 2018 in France and aiming to prevent fraud and corruption, obliges enterprises with more than 500 employees to implement procedures for assessing the position of clients, leading suppliers and intermediaries, as well as a map of potential corruption risks.
Why hiring a private investigator for due diligence?
Most of the data processed in due diligence are usually obtained directly from the target company. This includes for instance the financial packages, or technical informations regarding the industrial facilities.
However, to by complete and prevent more risks, the due diligence sometimes requires to collect additional informations which are not provided by the target. Some of them will be collected through a strategy study, for example on the market or the macro-economic environment. For other strategic data, it may be appropriate to hire a private investigation professional.
The private investigator skills will be especially useful for the ethics part of the due diligence. He will assess the risks linked to the target company managers and associates, such as:
- potential conflicts of interest;
- professional background, and the remaining relationships from past experiences. These links may be valuable or have adverse impacts for the interests of the company;
- legal backound and criminal records
Thanks to his investigations skills, the private investigator will be able to map the professional networks of the company key managers and to determine potential risk areas for the investors.
Like in any investigation case, he will have to respect the loyalty and proportionality principles, without violating the parties privacy.
In a nutshell...
Before a strategic investment or partnership, the due diligence helps investors to identify the financial, legal, commercial and ethics risks. If audit and consulting firms usually perform these due diligence investigations, private investigators may provide additional skills and valuable information before validation a investment.
Solvest supports companies and investors on due diligence investigations, and can investigate in France or abroad to help them with investing total peace of mind (see our expertise areas in Europe).