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Due Diligence

Veteran international investor John Corey comments

Due diligence: Some may see this as a ‘fancy’ term for investigating what you are getting into but bad due diligence can lead to large investment losses. Strong due diligence might cause you to move too slowly for some transactions. You also will never get to the true bottom of a situation. There may be things you just did not know to investigate. Let me break this into three sections.

What do you know?
The initial step in the due diligence process is to list or collect all the things you already know about the situation or deal you are interested in. Do this for two reasons. First, it becomes a laundry list of things you need to verify. Rather than assume something is true, dig into the details and verify that the facts are the facts. Look for evidence that something is true. Fake news and alternative facts can be bad for your health.

Second, when you are considering a deal or have agreed a deal in principle, then the list of things you know can become bargaining points later. You determine the value of the opportunity based on what you think you are obtaining. If you find that some of the details are incorrect, the value placed on the transaction is wrong. Maybe the price will be reduced or the terms changed. The information you have uncovered becomes your evidence for a renegotiated agreement. An honest renegotiation given the deal is not what you thought it was.

One landlord I once knew was a very religious guy and he had a strong moral compass. He wanted to buy a specific building for his charity. The seller wanted a specific price and it was definitely top of the market at that price. The buyer decided it was a deal worth doing as the building would work well for the charity. In addition, the buyer had measured the building. The seller was asking a top of the market price for an 8,500 square foot building while the buyer knew he was buying an 11,000 square foot building. Ignorance was bliss for the seller. Better information uncovered a bargain for the buyer. Verify the ‘facts’.

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