DueDiligenceGuru

Investment Due Diligence for Corporations

Mon, 01 Dec 2008 09:49:22 -0700

Investment Due Diligence for Corporations

Corporate investment strategy is about making choices, and at the end of the day, dealing with the consequences of those choices. The problems with making decisions about investments is that often corporate investment managers do not understand the impact of the decisions on their enterprise, and even worse, are not aware of every aspect of the decisions being made. The key is to make sure that the process is properly founded, planned, monitored, and assessed. A solid corporate investment due diligence program allows each step within the process to be fully understood and the related risks assessed.

Investments can be many different types:

Corporate Internal Finance
Credit from Customers
Credit from Equipment Suppliers
Credit from Suppliers
Credit Terms from Banks
Grants from Government Bodies
Lease Finance
Loans from Government Bodies
Loans from other Banks
Loans from other Stakeholders
Loans from own Bank
Loans from Owners
Preferential/Special Funding
Private Equity Capital
Public Equity Capital

Investments can come from different sources:

Advisors
Banks
Board Members
Existing Investors
Finance Firms
Individuals
Investment Banks
Government Sources
Industry Sources
Intermediaries
Merchant Banks
Principals
Team Members

Corporate Investment Due Diligence

A strong corporate investment due diligence process should provide corporate investment decision makers with a complete system. That system should include a list of steps to appreciate their investment wishes, to make their investments, and then to make sure that those investments perform to everyone’s satisfaction. Here is a series of recommended steps to understand and refine corporate investment programs, guiding those investments to perform at their best.

1. Set up Your Investment Fundamentals, including:

Build solid strategic and tactical plans for corporate investing
Determine if there any overly concentrated or restricted investments
Determine if there are any unrealized gains
Determine the existing portfolio investments, liquid & illiquid
Determine the liabilities of the existing portfolio investments
Determine the true investment experience of the team

2. Build a Solid Set of Investment Parameters, including:

Approval procedures for all steps in the investment process
Cash flow needs
Performance objectives
Risk tolerances
Tax planning
Time horizons

3. Develop the Investment Strategy, including:

Determine how much of your investment process will be internal or external
Determine the acceptable risk / reward ratios
Determine how to maximize the risk / reward ratios
Determine how to minimize tax costs
Determine what asset focus is appropriate
Determine how investment decisions affect corporate benchmarks

4. Implement the Investment Strategy

5. Measure Performance, including:

Performance Attribution
Performance Reporting
Performance Tracking

5. Monitor the Investments, including:

Review objectives & strategies on an ongoing, periodic basis
Revise methodologies
Monitor market conditions
Assess market conditions changes
Revise strategic assumptions
Revise tactical assumptions
Change asset allocations

The primary points for corporate investment due diligence are:

Accurately and totally define investment assumptions
Constantly and completely understand current investment strategies and tactics
Accurately define investment goals
Accurately define methodologies to achieve those goals
Implement carefully but firmly
Measure everything
Monitor everything
Change assumptions, strategies and tactics when necessary

Charles F. Bacon, CEO & Keeper of the Vision
charlesbacon@superdiligence.com
Due Diligence, Inc.

A Better Due Diligence Process, Conclusion

Mon, 03 Nov 2008 20:14:08 -0700

A Better Due Diligence Process, Conclusion

A corporate due diligence system and strategy will help improve financial performance, strengthen competitive positions, expand organizations more effectively, preserve human performance and develop internal know-how. With these improvements, companies are better able to grow through mergers and acquisitions, spin-offs, and alliances.

A corporate due diligence system adds new power to the organization, adding to the existing strengths of management and staff, creating more value for a unit or division, as well as improving its abilities and success rate when acquiring or merging with new firms. In a nutshell, it also can help prevent the decision maker from looking like an idiot.

The decision to go ahead with a decision will ultimately be based on opinion. One hopes it is an informed opinion.

Cable mogul Bill Daniels of Daniels Cablevision, regarded by the industry as "the father of cable television" had a sign on his desk that said it all: "A man's opinion is no better than his information."

Click here to learn more about Better Due Diligence.

Are You a Member of the Confidentiality Cult?

Wed, 01 Oct 2008 21:31:12 -0700

Are You a Member of the Confidentiality Cult?

(Part One of a two-part article)

Confidentiality agreements, also known as non-disclosure agreements or NDAs, are so prevalent at many levels of business as to be ubiquitous, especially in the United States. Yet, more often than not, these documents and their use are extraordinarily misunderstood, fatally constructed, or incredibly mismanaged. Even more amazing, often all of these issues exist in organizations simultaneously.

Intellectual property is the very foundation of society. Without ideas, and the ability to protect them, society would come to a screeching halt. Confidentiality and non-disclosure agreements are essential to this equation:

Protected Intellectual Property
Equals
Motivation for Innovators to Produce Goods and Services
Equals
The Continuous Evolution of Society

But, over the past few decades, a confidentiality cult has evolved, countless people thinking that they are not allowed to blink unless everyone executes everyone’s confidentiality agreement. The range of inanities is astonishing:

How can I trust you if you don’t sign our agreement?
Before we can talk about anything, we must spend countless weeks or months with the decision makers on both sides, the executives, the senior team members, the Board Members, your lawyers and our lawyers, and anyone else we can convince to be a part of this miasma.
Oh and let us not forget, we really like to spend lots and lots of money, before we even know if we have anything worth talking about at all.
Our lawyers insist everyone must execute confidentiality agreements. (For any purpose!)

This approach tells more experienced people that they are dealing with someone who simply is naïve… who has been ill-informed by the countless confidentiality cult members and is now a cult member themselves, the zealot guarding all the so-called secrets at all costs.

And, perhaps most disturbing, are the many lawyers, accountants and other professionals who believe that they must take this stance, otherwise they are not adequately protecting their clients.

Enlightened people know that ultimately there are two ways to protect intellectual property:

One: Simply never disclose the truly confidential or proprietary aspects of a business, product, service or innovation outside of the inner circle.
Two: If you must disclose confidential information, simply make confidential disclosures in stages, after developing good foundations at each stage for ongoing communications

The quickest way to damage a potential relationship with that wonderful introduction you worked so hard to find is to insist that nothing can be discussed until “we get the NDA out of the way”. If you approach people this way, the more sophisticated the business person, the more you are going to never develop that relationship.

Part Two: Rational Due Diligence Applied to Confidentiality Agreements

Better Due Diligence: Communications and Education

Mon, 01 Sep 2008 00:01:00 -0700

Communications and Education

A corporate-wide communication and education strategy and system are critical to a well designed due diligence system. People want to know why someone is poking around in “their” stuff. The aim is awareness and understanding about the benefits of sound due diligence practices.

One task is to overcome long-standing beliefs that “information is power that ought to be hoarded, not shared”. The message is simple – “We are not seeking fault. We need information from everyone to make this organization successful.”

An integrated internal communications strategy will ensure all audiences, regardless of their preferred mode of communication, hear key messages. It’s about setting expectations and then meeting them.

Click here to learn more about Better Due Diligence.

Why Every Company Needs a Business Plan

Fri, 01 Aug 2008 01:51:02 -0700

Why Every Company Needs a Business Plan

Over the decades, I have heard every excuse why a company does not need a business plan. Some of these excuses are very creative, some very silly, some very foolish, some quite daft, some very obtuse, some so ludicrous that no one can fathom the lack of reasoning. One young firm told me they needed data mining more than a business plan. Let’s ignore the obvious question of on what large group of data do they have to perform data mining when they are less than two years old. What will happen to this firm when they go to equity sources, or debt sources, or try to run their firm over the next few years, all without a business plan? Nada… Zilch… Nil… Naught… Nothing… Zero… Zip… In fact, the equity and debt sources will escort them right out of their offices, and the firm will wander, maybe get somewhere, most likely nowhere great.

‘Cheshire Puss,’… ‘Would you tell me, please, which way I ought to go from here?’ said Alice.

'That depends a good deal on where you want to get to,' said the Cat.

'I don't much care where-' said Alice.

'Then it doesn't matter which way you go,' said the Cat.

'-so long as I get SOMEWHERE,' Alice added as an explanation.

'Oh, you're sure to do that,' said the Cat, 'if you only walk long enough.'

Lewis Carroll, Alice’s Adventures in Wonderland

So… pick any direction … Are you going anywhere in particular? How long can you keep walking?

Here are some of the many good reasons why every firm needs a business plan:

When you want equity sources to consider your firm’s request for capital.
When you want debt sources to consider your firm’s request for capital.
When you want to show your sophistication.
When you want to have a focused set of activities for your firm.
When you want people to take your firm seriously.
When you want to show your firm’s history accurately.
When you want to show your firm’s management capabilities.
When you want to show your firm’s competitive marketplace position.
When you want to define where your firm is going.
When you want how your firm is going to achieve its goals.
When you want your firm to save money.
When you want your firm to save time.
When you want to understand your firm’s costs.
When you want to understand your firm’s potential losses.
When you want to show how prepared your firm is.
When you want to understand your firm’s revenues.
When you want to understand your firm’s customers.
When you want to understand your firm’s products & services.
When you want to control your strategies, finances, objectives, or anything else.
When you want to understand your firm’s people.

The list goes on and on. If you are leading a business or part of the team leading the business, you have to know where you are, where you want to get to, and how you are going to get there. Your business plan is an absolutely critical foundation requirement for your business, and your plan should be a living roadmap that changes and grows with the changes and growth of your business.

Fraud Prevention, Part 2

Tue, 01 Jul 2008 05:00:00 -0700

Fraud Prevention

Part Two

Read Part One.

From Part One: There are countless financial instruments, business documents and corporate/financial structures which are legitimate and have value. However, the con man, huckster, fraudster and scammer will use everyone and everything to part you from your money. Part One also contains a few recommendations to try to stay away from frauds and scams.

Part Two

Business-Related Frauds & Scams

1. Advance Fee Financing Scams (aka Up-Front Fee Scams): These are those wonderful brokers offering incredible financing for any and all purposes, including paying off all debts, erase bad credit, buy a gold mine, acquire a company, etc. Advance fees range from $10 to hundreds of thousands (even millions!) to cover anything from processing fees, first payments, "I'll hop a plane tonight to Zurich to get your money," etc., etc.
2. African-American Reparations: Quoted from the IRS Website: “The Internal Revenue Service today cautioned African- Americans not to be misled by anyone offering to help them file for tax credits or refunds related to reparations for slavery. There is no such provision in the tax law. Those who pay to have reparations-related tax claims prepared are being deceived. IRS centers nationwide have received a growing number of such slavery reparations claims this year, repeating similar experiences in 1994 and 1996. The IRS has seen two principal reparations schemes. In one, the person claims a credit for "black investment taxes" or "reparations for African-Americans." In the other, the person attaches a form listing thousands of dollars in tax withholding that, in fact, never occurred.”
3. Alaskan Trusts and Delaware Trusts: Supposed asset protection tools. The lawyers, trust companies and banks in these states are making money, but, sister state judgments are still enforceable in both Alaska and Delaware.
4. Annuity Abuse: Variable annuities can be good investments, but this arena is fraught with cons, misrepresentations, and what is worse, naive financial industry professionals who have not done their homework. And, only get into these investments if you are really careful, and really know what you are doing.
5. Anti-IRS theories (aka 16th Amendment): Run, do not walk, in the opposite direction.
6. Assembly /Craft Work at Home Scam: Just send in your money and you too can earn 100s and 1000s per month. All you have to do is purchase the kit/samples/equipment/training manual.
7. Asset Protection Experts with False Credentials: Countless people are presenting themselves as experts in asset protection. Legal and tax training is critical for professionals who provide valid asset protection services.
8. Asset Protection to Save Income Taxes: While asset protection plans will usually reduce estate taxes, no asset protection plan will reduce income taxes.
9. Asset/Revenue Understatements: Countless variations. Use a competent auditor, and if you smell something, use a forensically trained auditor.
10. Bait and Switch: Get excited by that super special low price, find out the product is junk, let the salesman talk you into the high price product.
11. Bank Examiner Swindle.
12. Bank Guarantee Frauds.
13. Bank Paper.
14. Bankruptcy Fraud.
15. Blocked Fund Programs: Just put up some dough and you too can get that money out of that third world or former eastern block country.
16. Bulk Email Scams.
17. Captive & Self-Insurance: If you create your own insurance company, you can pay yourself deductible premiums. Of course if you let the IRS in on the secret, they will tell you that there never was any chance that you could deduct anything, and by the way please pay the back taxes, interest, and those penalties that you owe.
18. Chain Letters.
19. Charging Order Protection: Often incorrectly used with Family Limited Partnership vehicle.
20. Child's Name Scam: Just give your money/assets to your child as a gift, and nobody can get it if they're trying to get it from you.
21. Concealed Liabilities and Expenses.
22. Constitutional Trusts and Pure Trusts: Wonderful idea. The Constitution must have given all us plain citizens magical protections against the evil government. Just don't let the IRS in on it, because these vehicles provide absolutely no benefits or protections at all.
23. Continuity Plans: Book of the month style, but they don’t send anything ahead of time for you to tell them don’t ship.
24. Corporate Fiefdoms: Watch out when some key employee or manager does everything in and out of his little fiefdom, especially where they have independent budget or purchasing authority.
25. Cyber Casinos.
26. Delayed Charge Offerings: You buy something, and you also find out later you have to buy another.
27. Diplomatic & Consulate Titles: Now you too can be a famous international diplomat, and nobody can ever arrest you, give you a speeding ticket, parking ticket, etc., and of course you never have to pay taxes again.
28. Dirt-Pile Scam (aka Gold Mining Scam) You get to invest in a gold mine. They even look legitimate, because it's quite easy to file a mining claim on land, often Federal land, but there isn't a real mine there, although you might find a few specks of gold in the fake assay you get when you try to check it out. Most often, the different parts of the scam, the mine, the sales operation, the assayer, corporate headquarters, etc. are in different states. Of course there's an impressive document to help convince you it's all legit, with pictures of the firm's executives, the mine, maps, assays, etc. If you are stupid enough to put in your money, you'll get pretty reports tolling the wonderful progress of the raw ore mining, refining operation, buying more mines, etc. These are also known as lull letters. In the end, the weather was bad, the labor force disappeared, equipment broke, the local officials screwed everything up with their big brother government requirements, or those silly environmentalists forced too much additional costs onto the operation.
29. Dominion of Melchizedek: A magical country in the South Pacific. Set up your bank or your offshore corporation, or participate in any number of incredibly wonderful financial programs. The magic is that there is no such country.
30. Employees whose lifestyle is beyond their compensation.
31. Envelope-Stuffing Work at Home Scam.
32. Fax Scam. Countless variations. Under the new laws, you can tell them not to send you any further unsolicited faxes offering office supplies/long distance telephone/vacations/etc.
33. Fictitious Revenues.
34. Foreign Trust Company: Let's see if we have this straight. You give somebody else your money and power of attorney so you can claim it's not yours and you don't have to pay taxes. Then, you don't have the money, and the IRS thinks you still have to pay them.
35. Former Eastern Block Banks: Here we go again, pyramids, or advance credit card fees, advance debit card fees, only this time those former Eastern Block countries have become capitalists, but their stupid, and therefore will pay you 1000's of percent on your money.
36. Free Seminars: They will tell you how to do amazing things that your accountant and attorney never heard of, and would never tell you even if they knew. Don't forget to buy all the books and tapes for hundreds and thousands of dollars.
37. Health Care and Health Insurance Fraud.
38. Health Magical Pill Scam.
39. Identity Theft (aka Impersonation Fraud, Account Takeover Fraud): Credit cards, checks, id's, etc. are stolen, and the identity is assumed, new credit is established, checks are forged, and bank accounts are accessed.
40. Improper Asset Valuations.
41. Improper Disclosures.
42. Incomplete Audit Trail.
43. Indian Banks & Trusts: Take advantage of Native American sovereignty and set up a bank or a trust that does not have to conform to US Federal and State laws.
44. Insurance fraud.
45. Intellectual property fraud. Copyright and trademark infringement violations, and trade secret theft.
46. Internal Audit: Right after the audit, the employee activates their fraud, since everyone thinks everything is all right.
47. International Chamber of Commerce (ICC) Scams that claim to use ICC documents and procedures, such as letters of credit or other special forms from the International Chamber of Commerce.
48. Home Lien: Your general contractor neglects to tell you that he didn’t pay his sub-contractors, so you end up with a lien on your home. Get a lien waiver from the general contractor and all sub-contractors and vendors, before you put out any money.
49. Letter of Credit Frauds.
50. Living Trusts: While a completely valid and legal vehicle, these have been seriously abused by the promoters and scammers.
51. Loaded Investments: Pay the financial planner the extra fees built in when they sell you "loaded" products.
52. Long Distance Telephone Scam: The target receives an official-sounding telephone call from a supposed telephone company employee, who says they are testing the line, and the target has to punch in 90# to complete the test. This gives the fake telephone employee the ability to make long distance telephone calls on the target's account.
53. Loss Leader: Put the competition out of business by selling below cost, then when you have the market all to yourself, charge whatever price you want. Sometimes also used with bait and switch tactics.
54. Magazine Subscription Sale: See Postage and Handling.
55. Management Claims: Everybody on my staff is honest, you don't have to check on them.
56. Medical equipment fraud.
57. Medicare fraud.
58. Missing Documents (aka Documents Accidentally Destroyed)
59. Missing Heir Scam.
60. Money Laundering.
61. Multi level marketing frauds.
62. Multiple order proposals: Buy your product, and find out later you ordered more products which will come later.
63. Negative Option Billing: You bought the product without even knowing, because the seller requires a rejection from you. Of course you probably didn’t notice because it was buried in the fine print.
64. Nevada Corporations: Over the years, we've seen more scams come out of Nevada then any other state for some reason. Maybe because of the corporate tax laws and so-called corporate secrecy. Who knows. In any event, if something smells wrong and it's from Nevada, even more reason to walk away.
65. New Credit: Now you too can instantly have a new credit file, and magically eliminate all your bad credit and all those nasty creditors who think you owe them money will disappear.
66. Nigerian Scam (aka Nigerian letter, Nigerian National Petroleum Company scam, Fax Scam, 419 Scam) An offer is received from an important-sounding person in Nigeria, sometimes other countries, with claims ranging from government over throws to murdered spouses who were high government officials, house arrest, etc. Assets are frozen by the new regime, hidden in a trunk, wrongly moved to another bank, etc. The dupe can make anywhere from large amounts to amazing amounts of money, by providing a bank account, form a new corporation, become a relative, etc. The dupe has to put up cash via wire transfer, or bring it to the country, and the assets will be miraculously unfrozen, the high government official will escape to a free country, etc. Reality includes money laundering, double invoicing oil or other commodity contracts (send the oversupply to another country outside Nigeria), bequests, etc. Cash is sent for collateral bonds, performance bonds, advance fees, transfer fees, credit, cod privileges. According to many sources, the Nigerian Scams are the third or second largest industry in Nigeria, and the government officials themselves are the bad guys. Another variation is that real or fake government officials contact victims of previous scams and offer the get the money back. Of course there are fees involved. Any such scheme should be sent to local authorities, who should refer the case to the INTERPOL National Central Bureau, who should then notify the Nigerian Federal Police. Over the years since I first started alerting people to this scam back in the early eighties, the variations of this scam have become ridiculous! I now have over 1,000 variations of these scams on file!
67. Obituary Hustle.
68. Offshore Bank Accounts: Nothing wrong with it. But you won't avoid any taxes, and if you follow the scammers' recommendations that you just have to keep the money offshore, be prepared to get a knock on the door some day from the IRS.
69. Offshore Bank: (aka Offshore Personal Bank, Offshore Private Bank) Go ahead and create your own bank in whatever country is popular with the scammers this year. Spend lots of money. Give it to the scammers, but don't expect to ever make a dime.
70. Offshore Credit Cards: Just put up the (processing, application, facilitation fee), and you too can have an unsecured offshore credit card with a great credit limit. Don't hold your breath waiting to receive the card.
71. Online Investment Scams.
72. Ponzi scams: Countless variations. The first investor gets part or all their money back from the next investor(s), and so on and so on, until the fraudster has built up enough cash to skip town, and probably start over again in a new location.
73. Postage and Handling: What a wonderful deal! Get that magazine, or whatever, without cost. Just pay the postage and handling, which turns out to be ridiculously high. AKA Magazine Subscription Sale scam.
74. Pre-Approved, False Credit Cards: The so-called credit card company offers preapproved credit cards, typically with a sizeable limit such as $5,000 or $10,000. There is a charge, typically $10-30 to get the card. When the card is received, the new cardholder learns that the credit card cannot be used to buy products anywhere but directly from the company.
75. Premium Stock Sales (aka Pump and Dump): You too can sell stock at a high price and then the stock takes a dive all the way to the ground. Just wait for the SEC Enforcement people to show up.
76. Pre-Notification Plans: See Negative Option Billing.
77. Prime Bank Instrument (aka Bank Trading Program, Bank Roll Program, Bank Debenture Trading Program, Bank Paper, Blocked Fund Program, Irrevocable Letter of Credit Program): Somehow, enormous profits will show up in days/weeks, and keep on repeating. The mark is offered to become part of a highly secret group that can make more money than anyone in the world. All the mark has to do is put money with other investors into a large pool, anywhere from millions to billions. The pool will then purchase large bank notes from the banks with the biggest names or countries' central banks or organizations such as the IMF, Federal Reserve, World Bank, and these notes are resold over and over again, within a short times, even within days, and everyone will get huge returns. No one can tell anyone about it, even their attorneys or accountants, because only a few people in the entire world are supposed to know. Variations include adding a wonderful tax haven domicile so that no one pays any taxes, or everything is guaranteed by a another bank instrument such as a letter of credit, or the mark puts up collateral to lend against and therefore the principal is never touched, etc. The mark cannot contact the bank, because they will only talk to people already in the know. Complex and impressive documents are available to mystify the naïve mark. The mark is often invited to an exotic location to attend an invitation-only private seminar. Banks, brokerage houses and law firms are sometimes involved, often fake organizations, but sometimes real firms are unwittingly involved.
78. Property Encumbrance: Somebody puts out fake loans that encumber your assets, so that you can protect those assets from whoever.
79. Publications Work at Home Scam.
80. Pyramid scams.
81. Quiet Price Increases: You are in a monthly contract, and the price goes up without telling you.
82. Religious scams.
83. Renewal Billing: After your first contract has expired, all of a sudden you get invoices for renewal, even after the service has been completed.
84. Rolling lab scams.
85. Sales Commissions: Financial planners who charge sales commissions have an inherent conflict of interest.
86. Secret Tapes or Books: Buy tapes or books to learn how to do anything from setting up an offshore bank, become your own country, pay no taxes, etc.
87. Securities and Commodities Fraud: Countless variations.
88. Self-Liquidating Loans (aka Self-Liquidating Walk Away Loans): The scammer charges 100s or 1000s for you to be convinced that there is no such thing as a loan for millions or billions that disappears.
89. Slave Reparation Fraud: Quoted from the IRS Website: “The Internal Revenue Service today cautioned African- Americans not to be misled by anyone offering to help them file for tax credits or refunds related to reparations for slavery. There is no such provision in the tax law. Those who pay to have reparations-related tax claims prepared are being deceived. IRS centers nationwide have received a growing number of such slavery reparations claims this year, repeating similar experiences in 1994 and 1996. The IRS has seen two principal reparations schemes. In one, the person claims a credit for "black investment taxes" or "reparations for African-Americans." In the other, the person attaches a form listing thousands of dollars in tax withholding that, in fact, never occurred.”
90. Sovereign Entity (aka Independent Sovereign Entity or Private Sovereign Entity) Become your own country, don't pay any taxes to anyone, including the country you live in. Variations include tax laws, 14th amendment, becoming a citizen of just your state of residence and not the Federal government.
91. Suspicious Documents: Usually accounting documents, including invoices or payment vouchers, which have no other referenced documents.
92. Sweepstakes Scam: You have won a brand new car/TV/house/motor home/boat. All you have to do is pay for the transfer/registration/preparation/transportation costs.
93. Tax Avoidance Programs.
94. Telemarketing Fraud.
95. The "Don't Tell Anybody" Scam: This is where your magical asset protection plan is so secret that you can't tell anybody.
96. Transfer Payments: Watch out if one of your trusted employees make a wire transfer or other payments to some exotic place, especially right before a holiday.
97. Up-Front Fee Scam: (see #1)
98. Wife's Name Scam: Just give your money/assets to your wife as a gift, and nobody can get it if they're trying to get it from you.
99. Work Backlogs: Keep an eye on employees for purposeful records confusion.
100. Yellow Pages Invoice Scams.

Help me keep this list current.

Please email me any business-related scams and frauds not shown here, and I will update this list. Thanks.

Fraud Prevention, Part 1

Mon, 02 Jun 2008 16:42:10 -0700

Fraud Prevention

There are countless financial instruments, business documents and corporate/financial structures which are legitimate and have value. However, the con man, huckster, fraudster and scammer will use everyone and everything to part you from your money. And some legitimate systems are abused or simply overused. Here are a few recommendations to try to stay away from frauds and scams:

Take your time. The fraudster needs you to make a decision on the spot. If you are being rushed aggressively, slow down even more, or just stop right there.
Check out every claim made in sales calls, written documentation and every website connected to the company.
Do a web search on each person and each company name. A lot of people think Google is the place to go. Google is great, but remember, there are a huge number of search systems.
Call your state's securities regulatory office and check if the party has violated securities laws.
If someone claims to be an expert in something that sounds too good, and especially if your attorney, accountant or financial planner never heard of the program before, cross check with people you know to be true experts in the area, although the best course of action is to simply say no and move on.
Maintain adequate internal controls to prevent internal frauds, especially when going through major corporate changes.
The most successful frauds are schemes where many people are involved, and perhaps only one person knows all of the details, and multiple locations are involved. Keep looking until you find all the parts.
Hire competent, respected and professional attorneys, accountants, and auditors, and bring in specialists on all major corporate actions.
Does the company have a phone number that works? Call it. Also, call the phone company's Information line and check if the phone number is for the same company.
Call the local Attorney General Office.
Never send money to a PO Box, unless you already know the firm.
Don’t buy anything from a new supplier or vendor until you have verified that the company exists and, ideally, check their reputation.
Never give out office equipment information unless you already know the party.
Email us. We will let you know if they are in our database of over 35,000 individuals and firms that we have collected in the last 25+ years.

The best advice: "If it sounds too good to be true….."

"I'm not so much concerned about the return on my principal as I am about the return of my principal." -- Will Rogers

A Few Fraud Prevention Resources:

Federal Bureau of Investigation (FBI)

Financial Crimes Enforcement Network (FINCEN)

Internal Revenue Service: Criminal Investigation Division (CID)

National Inventor Fraud Center

Secret Service: Financial Crimes Division
U.S. Postal Inspection Service

Securities & Exchange Commission (SEC)

The Better Business Bureau: Alerts

National Fraud Information Center

Due Diligence, Inc.

Next: Fraud Prevention, Part 2: Compiled List of Business-Related Frauds & Scams

                              Charles F. Bacon, CEO & Keeper of the Vision
                              charlesbacon@superdiligence.com
                                Due Diligence, Inc.

Better Due Diligence: Implementation and Monitoring

Thu, 01 May 2008 01:45:00 -0700

Implementation and Monitoring

The specific components in developing and implementing a due diligence system will vary greatly depending on the status of existing systems and the corporate culture. (Corporate culture is a huge factor, and one worthy of study and attention.) Once the foundations have been established, a list can be produced targeting specific projects, resources, responsibilities, and deadlines. Some of the projects that might be incorporated include:

Due Diligence Audits of each Department
Developing Due Diligence Decision-Making Specifications, Policies and Procedures
Identification of under-performing corporate decisions;
Review diligent decision specifications in each area of the organization, such as acquisitions, financings, research and development, geographic expansion, and hiring practices;
Define the due diligence processes required for corporate events;
Set overall corporate due diligence objectives;
Monitor due diligence objectives progress;
Inform vendors of the company’s commitment to high quality services;
Require vendors to have good due diligence practices;
Build in information on the due diligence system in the organization’s publications, including product literature, newsletters, advertising, and the annual report;
Create a risk minimization system;
Involve state and national regulatory agencies in a proactive fashion to promote goodwill and head off difficult securities problems;
Educate the company’s personnel on the needs and benefits of diligent processes;
Reward and recognition systems tied to due diligence efforts.

Click here to learn more about Better Due Diligence.

Holes in the Foundations (aka Traditional Due Diligence)

Mon, 07 Apr 2008 13:21:01 -0700

The Environment for Due Diligence

Legal professionals perform the clear majority of traditional due diligence projects. They typically also play the lead role, directing everyone else in the process. The second largest player in traditional due diligence projects are typically the financial professionals. The legal professionals’ are primarily concerned with all the legalities and any possible liabilities in a deal, and the financial professionals’ primary foci are the financial data and the tax consequences.

Due diligence does not exist as a separate discipline in the educational institutions. Due diligence is not taught in law, business, or in any schools. If discussed at all in the education environment, due diligence is buried inside countless topics. Due diligence is simply not a focus that the educational community has recognized.

Rather, due diligence has evolved over decades by tradition. It is very interesting that no one questions whether the traditional due diligence practices are sound. What is even more interesting that rarely does anyone look further into a prospective acquisition or merger beyond the mere basics.

I wonder if the two-thirds failure rate of all mergers and acquisitions has anything to do with this essentially blind acceptance of the entire traditional due diligence process?

Typically, the target of the due diligence tends to evoke irritation at the process from the beginning, and, as the due diligence process gets longer and longer, the reluctance to push for important information gets stronger and stronger. As the time lengthens and the costs rise, it becomes easier and easier for management to justify minimizing or even ignoring anything that is more difficult. Many if not most firms suffer from mild to extreme reluctance to consult more qualified outside expertise. It is amazing how many excuses can be found to cut short even the most minimal due diligence processes. Finally, all too often, the deal is done before any real due diligence, traditional or otherwise, takes place. Too many times the deal has been done in the board room or on the golf course, then the boss says ‘go do the due diligence but don’t bother me with the results, I am already working on my big speech to the shareholders bragging about this great deal.’

An enormous emphasis is also placed on the short term by almost all firms, especially those in the public markets. A quick increase in price or earnings for the stock market is in many cases the sole reason for an M&A transaction. Quick revenue increases or cost reductions often make management the hero, albeit almost always at the cost of the stakeholders in the long term.

I again wonder that, in light of the fact that approximately two thirds of all mergers and acquisitions fail completely, or fail to deliver the value expected, that there might be something wrong with the traditional due diligence process on these deals?

From my perspective, the traditional due diligence methods account for 10% to 25% of what I define as a complete due diligence process.

In my humble opinion, traditional due diligence looks too much at the past, and not enough at the future, and is usually too fast, and too narrow.

Important note: I am not saying that there is anything wrong with the countless great attorneys, terrific financial people, and top-drawer specialty consultants, of whom I have had the pleasure of working with many of them over the years. Quite the opposite… they are absolutely necessary. I am simply saying that their work is only part of a complete due diligence process.

Better Due Diligence: Form a Dedicated Due Diligence Department or Team

Tue, 01 Apr 2008 09:51:51 -0700

Form a Dedicated Due Diligence Department or Team

This will be a team effort. One person won’t accomplish what you need. Alternate perspectives are impossible in such a case. In essence, you can’t fix the mind you’ve got with the mind you’ve got.

Start by appointing a committed, eager, resourceful and authoritative due diligence system manager. This person has primary responsibility for implementing the due diligence system. It’s a full-time job. This person must be a believer, because the job is more than just organizing this activity; he or she will also be its champion and must clearly represent the commitment of top management. The due diligence system manager must have the authority right from the top to make it happen. Listen to this person, even when he/she says things you don’t want to hear.

The due diligence team begins by gathering information about all corporate activities and examining all parts of the organization.

The due diligence department/team must interact with all other departments of the organization. This is the crucial point where findings are integrated to provide a valid “big picture”, including the interrelations of the parts. Inter-organizational dynamics usually have positive or negative effects on the business – they are seldom neutral. Examination of one part of the organization in a vacuum will yield little of use.

All other departments must support the due diligence effort. Cooperation leads to better knowledge and acceptance of the due diligence process in the organization. Corporate leaders should even consider incentives to reward this support and cooperation and success over time.

Click here to learn more about Better Due Diligence.

Where Can Due Diligence Be Applied?

Sat, 15 Mar 2008 21:38:34 -0700

Where Can Due Diligence Be Applied?

I am often asked where due diligence can be applied. What follows is a partial list of the many areas where due diligence can help a company:

Accounting Procedures
Accounting Systems
Acquisitions, Mergers or Sales of Businesses
Analysis of Present & Future Products & Services
Assumptions for Projections
Attendance at Seminars, Conferences & Shows
Avoidance of Conflicts of Interest
Board of Directors Issues
Brand and Reputation
Budgeting
Business Plans
Buy-Sell Agreements
Capital Expenditures
Cash Flow
Communication & Teamwork
Compensation & Benefit Plans
Computer Systems & Capabilities
Contracts
Contributions of each Profit Center to Overall Performance
Corporate Acquisition Candidates
Corporate Budget
Corporate Culture
Corporate Planning
Cost Structures
Credit-Reporting
Customers
Decision Processes
Developing the Optimum Timing of Exit Planning events for generating the Optimum Value of the Transfer
Disaster Recovery
Document Flow
Employee Benefit Systems
Employee Hiring and Retention
Employee Satisfaction
Employee Stock Ownership
Equity Capital
Equity Compensation
Exit Planning for the Future Transfer of Business Interests to Family, Employees, Partners, or Outside Purchasers
External Market Environment Assessment
Financial Analysis
Financial Statements
Future Earnings Stream
Future Expansion Projects
Gifts of Stock or Securities
Industry Publications
Insurance
Intellectual Property Policies & Assets
Intellectual Property Security
Internal & External Business Documents
Internal Accounting Controls
Internal Audit Function
Internal Communications Strategy & Media
Issuance of Securities
Key Relationships
Key Senior Positions
Litigation & Administrative Actions
Loans & Financings
Management Communications
Management Succession Systems
Management Systems
Managerial Skills & Talents of Key Individuals
Market Research
Marketing & Sales Methods
Marketing Budget
Marketing Procedures
Methods of Evaluating Existing Products & Services
New Products & Services Evaluation
Objectives Set for the Business
Organization Chart, Existing Team & Planned
Organization Development
Organizational Structure
Outside Contractors
Outside Professional Firms
Partnership Dissolutions & Divorce Proceedings Affecting Business
Performance Reviews
Personnel Policies
Personnel Training and Development
Plans for New Locations
Press Interaction
Pricing & Pricing Strategy
Profit Generators & Indicators
Promotional Materials
Public & Private Offerings
Relationships with Vendors, Suppliers, & Alliances
Reporting Procedures
Research & Development
Resource Handling & Availability
Safety
Sales & Marketing Relationships
Sales Methods
Security
Shareholder Issues
Strategic Business Planning
Strengths & Weaknesses of the Organization
Team Growth
Technology

Applying due diligence to all parts of an organization will help improve financial performance, strengthen competitive positions, expand organizations more effectively, preserve human performance and increase internal know-how. With these improvements, companies are better able to grow through mergers and acquisitions, spin-offs, and alliances. Comprehensive due diligence brings new power to the organization, adding to the existing strengths of management and staff, creating more value for a unit or division, as well as improving its abilities and success rate when acquiring or merging with new firms.

Charles F. Bacon, CEO & Keeper of the Vision
charlesbacon@superdiligence.com
Due Diligence, Inc.

Authentic Leadership

Thu, 06 Mar 2008 14:22:21 -0700

Authentic Leadership

Guest Author: Levy N. Rivers, Advisor, Due Diligence, Inc.

During the 1990s, CEOs of most American companies focused on the bottom line with the single goal of creating shareholder wealth. The idea was for CEOs to look tough, act tough, and talk tough. Many of them would not have been caught dead discussing soft stuff like ethics, values, openness, or corporate responsibilities to customers, employees, and host communities. When the Enron/Andersen scandal broke, followed by a tidal wave of revelations of similar corporate crimes, the initial reactions among American business leaders ranged from deafening silence to “it’s just a few bad apples.” Not many spoke out in condemnation, and even fewer suggested the need for better executive behavior.

There is something refreshingly old-fashioned, therefore, about Bill George’s ‘Authentic Leadership: Rediscovering the Secrets to Creating Lasting Value’ (Jossey-Bass, 2003). During the 10 years George was CEO of the medical technology company Medtronic Inc., he practiced a philosophy in which “shareholders come third” — the belief that investors can benefit only as the result of efforts of empowered employees who effectively serve customers. To that end, George promulgated such business values as producing top-quality products, treating employees with respect, and acting with integrity in dealing with all his company’s stakeholders. The bottom line: Medtronic created $60 billion in value on his watch, and investors saw shares appreciate at a compound rate of 32 percent a year.

He says the secret to his stewardship was the practice of “authentic leadership,” the traditional approach to running companies that had been the hallmark of such now nearly forgotten CEOs as Max DePree (Herman Miller), Jim Burke (Johnson & Johnson), David Packard (Hewlett-Packard), Ken Dayton (Dayton Hudson), and J. Irwin Miller (Cummins Engine). These are leaders, in George’s words, who were “committed to stewardship of their assets and to making a difference in the lives of the people they serve,” leaders who had “a deep sense of purpose” and who recognized “the importance of their service to society.”

Importantly, he says there is no inherent contradiction between making one’s numbers (he did so himself 55 out of 56 quarters) and demonstrating ethical leadership; instead, he argues that leaders will not find the way to realize those two ends simultaneously if they don’t first establish doing so as their goal.

Guest Author, Levy N. Rivers, Advisor, Due Diligence, Inc.
www.superdiligence.com

Better Due Diligence: Perform a Due Diligence Audit

Sat, 01 Mar 2008 17:48:05 -0700

Perform a Due Diligence Audit

The effective due diligence system incorporates all information about processes throughout the corporation, and reflects how the pieces work together (or don’t). The first project is an initial corporate due diligence audit. To successfully complete this assignment, the new due diligence department will typically need help from outside services. The audit process traditionally comes from accounting firms, law firms, and industry specialists. While these sources are critical, they are focused on their own accepted expertise, experience, and viewpoints, and do not include all parts of a comprehensive due diligence process. Nor typically do they examine the interplay or cross-dynamics of their specialties across the organization. The view through a soda straw is pretty narrow. The team needs to ensure the corporate due diligence audit is fully inclusive and reflects operational realities and interdependencies.

Some critical aspects of a corporate due diligence audit should include:

Accounting Systems & Internal Controls
Analysis of Present & Future Products & Services
Assumptions for Projections
Click Here to get the complete list for a corporate due diligence audit

Click here to learn more about Better Due Diligence.

Better Due Diligence: Perform an Economic Analysis

Fri, 01 Feb 2008 20:00:00 -0700

Perform an Economic Analysis

The comprehensive Due Diligence Audit is used to estimate the costs and rewards for prospective decisions, and also is the starting point to compare future improvements. Part of this system is an economic analysis that should show how such a comprehensive due diligence policy and procedures system reduces risk and increases profits for the organization. It should also confirm that the new system does not create a burden on the corporation’s core business. Elements of the economic analysis establish what additional resources are needed to support any necessary changes.

Competent outside professional service firms should be involved to assist in determining change requirements and acceptable expenditures of budget and time. Such firms play an integral role in the overall corporate due diligence process.

The due diligence department is, in essence, an “Intelligent Mirror™” for all corporate operations.

Click here to learn more about Better Due Diligence.

Better Due Diligence: Objectives of a Due Diligence System

Tue, 01 Jan 2008 22:00:00 -0700

Objectives of a Due Diligence System

The due diligence department must coordinate with all other key operations of the organization to establish overall objectives of the due diligence system. Specific objectives are important to the success of the system, because they provide the focal points for tracking progress. Both qualitative and quantitative metrics can be used for this tracking activity. Some of the many metrics that can be used include:

Improvement of Profitability
Risk Reduction
Disposal of negative assets
Reduction of costs
Elimination of ineffective systems
Elimination of inaccurate data
Improvements in change processes
Improvements in documentation
Improvements in reporting to outside agencies

This kind of highly-efficient due diligence system can and more importantly should support all major and minor corporate events and processes, including:

Financings, both Debt & Equity
Expansions
Mergers and acquisitions
Technology acquisitions and licensings
Product development
Supply chain monitoring
Strategic and tactical planning
Operations
Marketing and sales

Ultimately, the system shold bolster shareholder and employee satisfaction.

Click here to learn more about Better Due Diligence.