Sophisticated private equity firms and institutional investors would never short circuit thorough financial due diligence in advance of acquiring a company, yet they often forego reputational due diligence, which can unearth critical insights into a target’s executive team, internal operations and as yet unidentified risks. Below we see how crucial reputational due diligence was in improving the terms – and potentially returns – of our client’s investment.
The Problem
Our client, a private equity firm focused on the tech sector, was seeking to make a significant investment in a cybersecurity company with operations and personnel in the US and abroad. In advance of their investment, leaders at the firm sought additional information regarding the backgrounds and reputations of the target company’s executives to identify any issues that might impact their investment or willingness to move forward.
Our Solution
Through extensive public records research in the US and relevant jurisdictions abroad, we identified a series of domestic issues and an employment-related lawsuit alleging both discrimination and a misogynistic workplace culture that unfairly targeted female and disabled employees. Four out of six of the company’s top executives had been or were currently going through divorce proceedings, with some court documents containing significant accusations against our subjects including addiction as well as spousal and child abuse. Research of deep and dark web breached data identified accounts for multiple company executives on websites such as Ashley Madison and Adult Friend Finder, accounts that were created using their personal information and identifiers despite these subjects reportedly being experts in the field of cybersecurity.
Based on the quality of the information in our initial reporting, our client authorized our team to call former employees of the company to develop additional insight into these issues and their potential impact on the workplace and the company's operations. While no sources highlighted any issues with the company’s services or their efficacy, numerous sources spoke of a workplace fraught with high turnover and low morale. Various sources described certain company executives as “abusive,” “toxic,” “behaving inappropriately around women” and as having drinking problems. In addition, multiple sources spoke of shady accounting and business practices involving the top sales executive leaving “side deals” or “promises” to clients off official purchase orders which significantly inflated the company’s Annual Recurring Revenue (ARR), the gold standard metric for SaaS company valuations. Sources also alleged conflict of interest issues, including that a member of the C-Suite had steered a multi-million dollar contract to an agency in which he had a hidden ownership interest.
The Outcome
Because of our due diligence, our client was able to return to the negotiating table armed with additional insight to restructure the terms of the deal in their favor, including giving our client greater equity in the company and a greater say in personnel decisions, particularly regarding existing executive team members.