Performing Due Diligence on Private Companies
June 2007
IN THIS ISSUE
— Acquiring or Investing in Privately Held Companies
— Conducting a Thorough Check-up: Researching Private Firms
— In the next issue
GREETINGS!
Welcome to the June edition of our newsletter. In this issue we’ll examine the process of researching a potential acquisition or partner that is privately held, and the pitfalls that can occur if that process is not handled correctly.
Your clients, customers or colleagues may see investment in smaller, private firms as the engine that will drive their business growth. Follow these simple steps to be sure they aren’t led astray.
ACQUIRING OR INVESTING IN PRIVATELY HELD COMPANIES
Privately held companies present a world of opportunity for large and small firms alike. Growing companies, especially those in innovation-driven markets like biotechnology, can seek out a complementary partner to further their research and development efforts. For larger companies, the opportunity is more likely to arise in the form of acquisition or investment in the smaller company, melding the resources of a large company with the quicker reaction time, efficiency and unique perspective a small company can provide.
Yet many risks exist when considering whether to invest in or acquire a private company. Unlike publicly traded companies, private firms are regulated solely at the state level, and thus must not disclose nearly as much information as those regulated by the U.S. Securities and Exchange Commission.
CONDUCTING A THOROUGH CHECK-UP: RESEARCHING PRIVATE FIRMS
Despite less regulatory oversight than publicly traded companies, there are several resources to investigate private companies, including:
• The Better Business Bureau, www.bbb.org. This non-profit body compiles and investigates complaints filed by customers against companies. This is a nationwide organization with a presence in every state, most often in major cities.
• State Attorney General’s offices. While many complaints filed by the Attorney General against a company will become the subject of litigation, this office may also hold records for complaints that were investigated but not ultimately prosecuted.
• Secretary of State’s offices. The most traditional source of information, in most states companies are only required to file annual reports listing officer and director turnover after they file their articles of incorporation or formation.
• Dun & Bradstreet. Although reported by the companies themselves, Dun & Bradstreet has become rather reliable because of the volume of information they collect, including payment histories, public records and banking information.
• Litigation and other public records. As with most research, checking for litigation against a company, or unpaid tax bills, liens, and the like, is always a good idea before considering an investment.
Following these steps can help you get a sense of whether a company might be a good investment. Remember to keep things in perspective — even a series of minor problems at a company might present more of an opportunity than a risk, depending on your client’s risk tolerance and willingness to turn potentially troubled companies around as a value proposition.
Of course, should your client start seriously considering an investment, it is always best to retain an independent Certified Fraud Examiner to conduct research and thorough interviews with former associates and employees to get the full picture. We have several years of experience researching privately held companies for both pre-acquisition due diligence and competitive intelligence purposes.
IN THE NEXT ISSUE
In the next issue, we’ll look into the pluses and minuses of partnering with or investing in foreign companies.