GettyImages_77384047.jpgOne of the biggest misconceptions about due diligence is that it is a one-way street.  People assume that either they are scrutinized or doing the scrutinizing, but never the twain shall meet.  But this shouldn’t always be the case. In some instances, the person under the microscope also has a responsibility to make sure that they subject the other party to thorough due diligence. 

Take the future employee or the new member of an organization. Applicants for jobs, executives under consideration for management positions, people tapped to join the board of a corporation or a nonprofit realize that every new hire could either help an organization thrive or cause it irreparable harm.  And so people make their resumes available, provide a list of references, sign consent forms for more invasive analyses and then anxiously await to hear what the search unveils.

But just as the organization will be judged by the people it hires, employees are judged by the company they keep.  To ignore any potential red-flags risks being deemed guilty by association. In order to look out for their own best interest, potential future employees need to do some due diligence of their own.

  • Is the company or group reputable?  Does it face any criminal allegations or civil suits? What sort of public relations issues has it dealt with? Are there any crises brewing?
  • Are the people they will be working with well-respected and trustworthy?
  • Is the company fiscally responsible? No one wants to find out that the company finances are going south when a paycheck bounces. 

The sense of being under the microscope is magnified when money is on the line. Small business owners pondering private equity offers know that in order to obtain any funding, they have to consent to having their financial past and present probed.

But sellers don’t always consider that they have some due diligence of their own to do.

A recent New York Times article, “Owners Should Know What They’re Getting With Private Equity” summarizes the numerous issues small business owners ponder when weighing private equity offers.  First and foremost, small business owners have to do due diligence on the private equity firm. As Michael A. Smart, a managing partner of the private equity firm CSW bluntly advises small business owners, “I’m doing diligence on you, you should do diligence on me.” 

This is about more than money.  Private equity firms promise expertise, connections and experience to tap into new markets. Small business owners have to make sure that they can deliver. So, what sort of due diligence should small businesses do on private equity investors?

  • Background checks
  • Talk with former clients. Ask what sort of value the investors added. Did they deliver what they promised?
  • Speak with members of corporate boards where the firm’s investors are active.

Knowledge is power, and the more knowledge a small business owner has going into a deal with a private equity firm, the more likely they are to get what they bargained for.