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Those who say it cannot be done, should not interrupt those doing it.
— Chinese Proverb
 
 

Let’s Make A Deal: Why Investigative Due Diligence Is Key to Making the Right Decision

Our home state of Texas is business friendly, with no personal or corporate tax.  In 2014, the City of Austin was rated the seventh best city in the country for young entrepreneurs by the business website, Nerdwallet.com.  According to the National Venture Capital Association, Texas is rated fifth on the list of the top venture capital states in the U.S.  Clearly, we live in a state that encourages entrepreneurism, facilitates corporate growth, and taxes judiciously. 

The healthy business environment in Texas is exactly why companies that are contemplating a merger or acquisition – as either a buyer or seller – should be conducting investigative due diligence in anticipation of the deal.  Business decision makers need to evaluate a possible transaction from all angles to make an informed decision. 

Ringing in the New Year is a great reason to ring in a renewed commitment to investigative due diligence.  What is an investigative due diligence?  It is a compilation of facts gathered from public and human sources that supplement the financial and legal analysis with information related to character, reputation, and integrity.  In short, an investigative due diligence provides the color between the lines of the financial and legal assessment.

Even those companies that possess a high media profile can be a risky investment.  You might ask, how can that be?  Wouldn’t this company be scrutinized in the media?  Not always.  Take, for example, the blood-testing lab company, Theranos, that was started by a 19-year-old Stanford drop out, Elizabeth Holmes, in 2004.  Holmes rocketed to fame, becoming the youngest female billionaire and the subject of numerous media profiles.  She was named as an Ambassador for Global Entrepreneurship by President Obama.  According to a recent Los Angeles Times article, Theranos was valued at $9 billion two years ago.  $400 million is reportedly from venture capital, including from media tycoon, Rupert Murdoch, who invested $100 million of his personal fortune in Theranos.  The millions of dollars invested in Theranos were based, in part, on claims by Holmes that Theranos had the technology to diagnose a variety of diseases through a pinprick of blood.  In 2016, Federal regulators investigated and ultimately debunked these claims, issued sanctions, and banned Theranos from operating a lab for two years. The company is currently facing several lawsuits from its investors, who are claiming that Theranos made false and misleading comments about its technology. On January 11, 2017, Theranos laid off 155 employees, or 40% of its workforce. 

The moral of the Theranos story is that even a highly touted, prodigious company can have issues that are hiding behind the curtain. In the case of Theranos, an investigative article published by The Wall Street Journal in October of 2015 into the company’s claims prompted the federal government to conduct its own review in 2016 and was the catalyst for the problems that Theranos is currently confronting.  Employees, scientists, and other experts have come forward to express their skepticism about Theranos’ technology and lack of peer-review published studies. In light of the new information that continues to be uncovered, several questions come to mind.  How much due diligence was performed prior to investment? Did the investors rely on the media hype surrounding Theranos and Holmes instead of asking their own questions? If more information had been available to investors, would it have altered their decision to capitalize? While we do not know the mindset of the investors, the lawsuits seem to suggest yes. 

If you are interested in more information about our investigative due diligence services, please contact Stephanie Woodhead at Workplace FactFinders, (844) 321-9733 ext. 701 or email her at swoodhead@workplacefactfinders.com.

The information contained in this article is not legal advice and should not be relied upon as such.  Employers should consult their attorney for legal advice.

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