Watch out: Background screening red flags during a merger or acquisitionDate:
23 Jan 2018
The business world is often transitional, and the landscape changes as entities grow or industries change – and the players involved have to change with it. Mergers and acquisitions are examples of these “transitional times,” and they are also among the most critical times to conduct proper and thorough due diligence.
There are inherent risks involved with the “unknown factor” that outside entities represent. By nature, merging with another entity, or acquiring it altogether, can be an exciting time, but background screening is especially crucial at this juncture.
When conducting due diligence before a merger or acquisition, what are some of the red flags that should make you take a closer look?
CRI Group has conducted numerous due diligence engagements for clients undertaking major business deals. Our agents have also conducted many investigations for organisations that failed to do proper due diligence, and as a result became victims of fraud. Our findings in those investigations have provided a roadmap of things to look for, and be cautious about, when in the pre-merger or pre-acquisition stage.
Here are a few red flags for any organisation undergoing a merger or acquisition:
Legal issues. When merging with or acquiring another entity, due diligence will uncover legal proceedings, including any troubling issues that the entity might have been trying to keep hiding. Past or current litigation or even criminal proceedings have been uncovered in background checks.
Credit risks. Some potential partners might be financial landmines, bringing the kind of baggage your organisation cannot afford. Has the entity claimed bankruptcy? Have they dissolved prior companies or are they faced with debtor filings? Proper due diligence will uncover these and other financial risk factors.
Lack of experience. If your organisation is looking to partner with a contractor or service provider, what is their experience level in the industry? Have they successfully completed past projects of a similar scale? Nothing can hurt your reputation with clients and customers more than having your deliverability affected by a contractor that cannot handle to job.
People problems. Hopefully, your organisation conducts thorough employee background screening of all potential and current employees. Can you say the same for the entity you are considering for a merger or acquisition? If not, the risks are great: fraud risks, criminal conduct, even employees without the needed training or skill level doing dangerous jobs could all come back to damage your own organisation and reputation. Comprehensive and thorough background screening, including of owners and principals (perhaps these are most important) will uncover such risks.
None of these red flags, on their own, are necessarily absolute roadblocks to a proposed merger or acquisition. Some scenarios can be explained, and certain circumstances simply require a fuller explanation.
But the key is having the information. In business, being surprised is generally not a good thing. This is never more true than when dealing with mergers and acquisitions.
Contact CRI Group today to learn more.