Thorough Due Diligence Includes Background Checks on C-Suite Execs

The amount of due diligence that goes into an M&A deal is always amazing, but just as surprising is how often these transactions get derailed when firms do not check out their own C- level executives beforehand. It is a fairly basic step, but one that can easily get overlooked.

Mistakes happen during background checks when corners are cut to save money or from incompetence. It could be as simple as someone else with the same name having negative records that mistakenly end up on your report.

Here is a real life example: A chief executive officer had been in negotiations to sell his company to ABC company. The deal was never completed and no reason was given. The CEO felt that financial reasons killed the transaction. He was wrong but did not know it.

The real reason came out later -- a background report had been produced on the CEO and his two executive officers, one of them being John F. Jones, EVP.

The report on Jones said that six years earlier when he was at another company a subordinate had accused John E. Jones, VP, of sexual harassment, not John F. Jones EVP. The names and titles are very close, and the background check company made a mistake. The report combined Jones EVP with Jones VP's past history. It was a tiny slip-up with big consequences.

Mistakes like this are more frequent with inexpensive background checks. It is important to conduct high-level due diligence background checks with an experienced firm that does not cut corners or outsource work overseas.

Look for a firm where search results are reviewed for accuracy by staff members and not by computers.

In pre-employment checks, a signed release is required before a background check can take place. However, in the M&A due diligence process, a release is not required to conduct a background check nor is there any obligation to share the information in the reports. This is why the Jones mix-up never came to light.

There are several ways a company can avoid falling prey to inaccurate background checks. First, a company should always do exhaustive background checks on its own executives. This is critical because the deal could ultimately hinge on what potential investors learn about these C-level executives.

It is better for a firm to thoroughly check out its own executives beforehand to know what will be revealed and how best to handle it. A complete background search will typically include any existing criminal records, lawsuits, liens, judgments and bankruptcies as well as any media references, good and bad.

In addition to running background checks on key executives, a company in the M&A marketplace or seeking financing should do the following:

* Ask if background checks are being conducted and which executives are being checked.

* Ask to see the reports.

* Ask for the opportunity to correct inaccuracies and explain negative information.