By Nona Patronite, Managing Director of Investigative Services
Background checks are a critical component of due diligence in private equity deals. These investigations help stakeholders identify potential risks, whether legal, reputational, or operational, that could impact deal value or post-transaction performance. While financial and legal reviews are standard, background checks provide a deeper layer of insight into the individuals and entities involved in a transaction.
What is the Purpose of Background Checks in Transactions?
The primary objective of background checks in PE transactions is to uncover any red flags that may not be evident through conventional diligence. Background checks investigate:
- Litigation and Regulatory History: Identifying past or ongoing lawsuits, regulatory infractions, or sanctions.
- Reputational Risk: Uncovering associations with fraud, corruption, or other unethical behavior.
- Financial Background: Reviewing personal or corporate bankruptcies, tax liens, and other financial documents to identify undisclosed financial risks.
- Professional History/Verification of Credentials: Confirming the professional and academic history of executives, founders, and key personnel.
- Undisclosed Affiliations: Identifying other business interests that may present conflicts of interest or compliance issues.
- Media and Social Media Reviews: Scouring individuals’ digital footprints to monitor any negative media, risky behavior, or data risks.
What are the Key Subjects of Investigations?
- Executive Teams: This includes founders, C-suite executives, board members, and significant shareholders.
- Target Companies: Investigations cover historical operations, regulatory compliance, and reputation.
- Third Parties: These may be key suppliers, partners, or intermediaries associated with the transaction.
What is the Timing and Scope?
Background checks are typically initiated early in the diligence process but can be phased based on deal stage and risk tolerance. For higher-risk jurisdictions or sensitive industries, the scope may expand from the above items to include asset tracing or source and reputation inquiries.
What is the Importance in Risk Mitigation?
Overlooking background checks can expose acquirers and investors to risks that lead to regulatory scrutiny, reputational damage, or even deal collapse. Unfortunately, we have seen this on numerous occasions. Conversely, a robust investigative process strengthens the foundation for informed decision-making and post-close integration.
Conclusion
In an increasingly complex deal landscape, background investigations serve as a necessary safeguard. For private equity firms and strategic acquirers alike, these checks provide a vital complement to financial and legal due diligence, enhancing transparency and protecting long-term investment value.
LCG Advisors is a leading financial consulting and transaction advisory firm specializing in mergers & acquisitions and other select advisory services. We offer a wide breadth of services, providing clients with one comprehensive source for high-level advisory expertise.
For assistance with background checks and all other investigative due diligence needs, please contact Nona Patronite at [email protected]. Our experts are ready to conduct the investigations you need to assist in making the best business decisions.