It was a deal that might have made them players. At the very least, it would give them a position on the East Coast.

Nearly everyone at the San Francisco-based computer company was practically salivating over the prospect of the acquisition when someone suggested a due diligence review might be wise. That’s when the company called Research Associates Inc.

Arthur Sommer, RAI vice president, and his team investigated the owner of the company and found information that just didn’t add up. As a result, RAI’s client called off the deal.

Six months later, Sommer received a call from the client saying she was going to fax him a press release about the company they’d chosen not to acquire. She asked him to call her after he’d read it. Sommer’s first thought was that the Westlake-based investigative company had made some sort of mistake, and that the woman was angry RAI had led them away from the deal.

But after reading the release, Sommer felt vindicated.

“The FBI had arrested this individual for fraud,” he says. “He had sold the company (to someone else) for in excess of $8 million, had misrepresented the revenues of the company, had misrepresented the number of employees and the general size of the company. Part of the deal was that he would have a three-year continuing role with the company to make the transition as smooth as possible.”

But, according to this news release, the same day the acquiring company wired the money, the man wired it to a bank in Switzerland and fled the country. The release stated the acquiring company was bilked out of $10.8 million.

Sommer’s client was calling to express everyone’s relief. RAI’s investigation lasted about five days, cost between $1,000 and $1,500 and saved the company $10.8 million.

“I think it’s easier to pull off (fraud), especially now with the Internet,” Sommer says. “You’ve got a lot of fast-moving deals with the dot-com boom. You’ve got a lot of start-up companies with people with very limited track records heading them up and potentially making a killing.”

That’s why Sommer and his partners, Kevin Prendergast, president, and Dean R. Kutz, vice president, recommend investigating potential merger and acquisition prospects before signing on the dotted line.

“We found differences in the size of the company itself as far as sales and as far as employees,” Sommer says of the East Coast company. “We also found in the Dun and Bradstreet report he claimed attendance at some very prestigious universities, claimed a Ph.D., an M.A., some very advanced degrees. One was from MIT. We could not confirm that through the school.”

The seller also claimed a Ph.D. through LaSalle College. During the course of the investigation, it was determined that LaSalle College was actually a correspondence school, did not have accreditation, and Sommer could not confirm the Ph.D. was ever obtained.

RAI was started 46 years ago by former FBI agents in an effort to provide the private sector with the same type of services they performed for the government. In addition to due diligence investigations, the company also performs pre-employment background checks.

Stories of employees walking into the office with weapons and shooting at co-workers has raised the consciousness of corporate America about the need to look into employees’ histories. Background checks account for about 60 percent of the business.

“Companies have a duty to check people out,” Prendergast says, “to provide a safe workplace.”

RAI uses a variety of techniques (see sidebars) to look into the backgrounds of both companies and individuals. And as the world gets smaller, with companies partnering with businesses around the globe, the task of investigating has become more challenging. RAI uses associates to help investigate foreign enterprises and maintains associations with investigators in nearly 40 cities around the world.

And greater numbers of business owners are using services like the ones RAI offers.

“Today, there is a much larger demand for due diligence services,” Prendergast says. “With so much on the line, companies today aren’t willing to take the risk of not knowing exactly what they are getting into.”

How to reach: RAI, (440) 892-1000

Daniel G. Jacobs ([email protected]) is senior editor of SBN.

When to think twice

Sometimes the deal looks so promising and the owners want it so badly that they’re blinded to clues that could — or should — make them wary. Here are some things to watch out for:

1. The information seems to inspire “awe.” In other words, if it seems too good to be true, it probably is.

2. The prospect uses an agent rather than appearing in person.

3. Requested information is never delivered.

4. A foreign location is involved.

5. The company requests you provide “earnest money.”

6. The company demands secrecy.

7. The company offers vague personal information.

8. There is a rush to get the deal started.

9. The company is less than 2 years old.

Investigating managers

The resume is superb. It shows a work history that surpasses any other candidate in the field.

There is only one problem: It’s all a lie. How do you know? Before you hire any management level personnel, you might want to consider a background check. Here are some issues worth examining:

1. Chronological review. Checks the candidate’s activities from high school to the present. The review looks at all the months and years accounted for on the application/resume and makes sure that all gaps are reported and explained.

2. Identification. Ensures the applicant is properly identified throughout the entire investigation by using sources such as credit bureaus, schools, licensing agencies, employers, Social Security number traces and driver’s license records.

3. Education/license verification. Determines that all the candidate’s claims about educational degrees, professional licenses, certifications and memberships are confirmed.

4. Employment verification. Includes the basic examination of hiring and termination dates of all previous employment, as well as professional title, salary confirmation, reason for leaving and eligibility for rehire.

5. Credit review. Checks into the applicant’s financial history and looks for red flags such as high credit balances and overdue accounts.

6. Court research. Covers information of public records in counties and federal jurisdictions based on where the candidate lived. Investigators look for civil, criminal or bankruptcy matters that could affect performance.

7. Driver’s license review. Looks at the driving status and history for suspensions, restrictions and violations such as DUIs.

8. Newspaper indices. Investigates whether the candidate was ever mentioned in the press and offers more insight into the individual.

9. RAI Scan. RAI uses its own proprietary database of criminal activity, which has collected information over the past 40 years.

Source: RAI