Due Diligence Is Not Cheap, But Why Do The ‘Sharks’ Carry It Out?
Investment is one of the ways for individuals or companies to grow their businesses. However, every investment carries risk of loss, including the fraud factor. There is no such thing that we call flawless investment.
Quoting from an English poet Francis Quarles “Let the fear of danger be a spur to prevent it; he that fears not, gives advantage to the danger “, although the investment product has a guarantee of security and legality, an investor needs to always instill caution in every investment decision.
This is where the role of due diligence which as a front liner in preventing investment fraud. This process does take a lot of time and money but helps potential investors to uncover the facts and make reasonable decisions to prevent greater losses in the future.
Due diligence is not cheap
Due diligence also distinguishes professional and amateur investors. In one of the most popular TV show Shark Tank, for the ‘sharks’ carrying out due diligence before making an investment decision is an obligatory ritual. These high-caliber businessmen and investors only get a piece of information when the participants are pitching. Of course, it is impossible for them to pour funding based on those brief non-validated information. After considering the information from the pitching, they did due diligence on the participants’ business proposals, then an investment decision was made.
One of the ‘sharks’, Glen Richards acknowledged that making an investment agreement in Shark Tank was not a cheap process because it took time and money. However, due diligence has been a part of the process carried out by professional investors. He usually asked the participants to include details of their businesses, and then he and his personal assistants, who were accountants and auditors, examined every detail.
Not all investment proposals reach an agreement after due diligence. Barbara Corcoran revealed there were many reasons why there was no agreement. For example, participants always talked about their sales, but after due diligence done, the investors found that the number was invalid. Another example was when a participant claimed that he owned the business, but turned out it was actually owned by a former brother-in-law. For investors, these discrepancies and false statements are bigger potential losses than the spent cost on the due diligence and are only discovered after due diligence is carried out.
Dig factual information as needed
There is no standard in conducting due diligence because the needs of every businessman or investor are different from each other. A simple example, when we want to invest in a house, besides paying attention to its prices, we need to find out factual information such as security and comfort of the surrounding environment and its building structure. Of course, we don’t want to find any walls that are cracked in just a few months after we live in the house. In contrast, factual information that we need to explore is to invest in a culinary business, food stalls.
In some cases, initial due diligence can be done with internet-based checks to save time and money. We can check the background of the company owner and the track record of the company, after that, we examine the documents and the field. Due diligence does not guarantee that we are completely free from the risk of loss, but this process clearly minimizes risk.