Acquisition Marketplace Review - The Journal of Applied M & A Theory

Do It Yourself M & A Background Checks

A few months ago, I looked at an interesting deal. The product had great features and the company was showing lots of strength in terms of revenues. Looking at the initial due diligence materials, I read through the bios of the management team. With a quick check of the Net, I found out that the CEO had recently signed a consent decree with the Securities and Exchange Commission (SEC).

I asked him, "Why didn't you disclose this?"

His answer was, "I didn't think it was important."

It was, of course, very important. This is not to say that it was a deal breaker. However, if a transaction begins on a note of duplicity, it can easily kill a deal.

In due diligence, it is often the case that the buyer will go through a long checklist that covers such things as corporate structure, the financials, legal, and so on. Interestingly enough, an often neglected area is background checks on the key principals of the selling company.

This can be a big mistake, of course. As we have seen over the past few years, no company is immune from shenanigans or downright criminal behavior.

In fact, there are many cost-effective services that can perform background checks, such as US Search ( and KnowX (

Moreover, with the power of the Internet, it is much easier for a buyer to conduct his own background check.
What are some of the techniques you can use? Let's take a look:

US Patent & Trademark Office ( In one business plan I reviewed, there was a mention of a patent on the company's technology. So, I went to the US Patent & Trademark Office's Web site and searched their database. The patent did not exist. Ask the other party for the Patent number. Then you can search the database at the following:

Securities and Exchange Commission ( The SEC has a section that includes enforcement actions. This is how I learned about the consent decree described in the story above. Also, you can search the EDGAR database on the site. This has most of the required filings for almost ten years. You can learn about the different companies an officer or director has been a part of. Did they sell a lot of stock? Is the company still around?
You can find the enforcement actions at:

Federal Communications Commission ( The FCC regulates a variety of commercial practices. An important area is marketing. At the FTC site, you can search to see if the individual has been sanctioned for illegal marketing activities.

Attorney General's Office: Each state has an attorney general's office. The federal government also has such an agency. And both pursue criminal violations. You can find state agencies at the following:

National Associations of Securities Dealers Regulation ( The NASD regulates the securities industry. If you want to learn more about another investment banker, this site may be of help.
The location for the database is:

Better Business Bureau: Each state has a BBB. From this agency, you can learn about customer complaints. Here is a resource: Of course, this is a tremendous search engine. I have found lots of useful information, especially newspaper articles that provide reputational information.

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