The Due Diligence Gripe

capital corp merchant banking complaints due diligence

Funding a project is no easy thing; there are hoops to jump through.  Just like anything worth doing, though, it is worth doing right. And doing it right means being thorough. So let’s say you come to a project financier/lender/bank/etc and you come with all your documentation, all your i’s dotted and all your t’s crossed. Perfect. You’ve done all the work and you know this is going to speed things along because you’ve already done the work for them – right? Wrong! There needs to be a due diligence performed independently because if the financier ‘takes your word for it’, then they are guilty of not being objective – legally and otherwise.

So what to do? What to think?

Some people dispute the need to pay for an exhaustive Due Diligence, which has to be done before any funding is granted.

So what is a due diligence, then? A Due Diligence is the process of evaluating a business and identifying the risks in owning the business and/or the assets from a legal, business and financial standpoint. This way an investor can make an informed business decision about whether to proceed with the transaction on the proposed deal terms.  In other words, it’s the identification of the potential “Deal Killers.”

In equity funding or commercial/ industrial funding the due diligence is the equivalent of a bank running a Credit Bureau verification and a complete investigation on an applicant before authorizing either a car loan or a mortgage loan or any other type of funding, and any bank will charge the applicant a fee to cover the cost of the Credit Bureau report, and most of the time will charge a Non-Refundable Application Fee (see another entry in this series about fees, fees, fees).  Having said that, we urge people to be realistic and not expect any Corporate Investor, Commercial Lender or other type of Funders to invest hundreds of hours in a Due diligence and not charge clients for it!

Why, you ask?

As regulation and oversight increase year after year, the benefits of a Due Diligence also grow.  In the past, the findings of the process would only be for the eyes of executive management or ultimate investors/shareholders of a company/project.  But with recent corporate scandals it has become even more important that all company stakeholders be made aware of the results.

In addition, employees of a company have a vested interest in the group’s success, especially with many paid on a performance basis, and therefore are becoming more concerned with learning how the company is operating.   Not to be forgotten is government regulators and the importance a Due Diligence has on the ability for a company to continue operating.

One final point must be made around the fact that when completing a due diligence, the administrators of the process must account for the end user of the information.  For example, government regulators commonly have a set form in which all information must be presented while top management or shareholders are often more concerned with the “bottom line” to assess whether the company can continue to prosper.

All in all, while we always understand that you’re eager to break ground and get going on advancing your project and getting funded – and that is certainly what we are trying to achieve for our clients – the due diligence process is part-and-parcel of getting funded and will ultimately become the foundation upon which to build your customized funding structure.

Always make sure that you make an informed decision in all cases,

All the Best,

The Capital Corp Team

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