Behind-the-scenes business games – how to control risk. Case Study

In the business world, one decision can be the key to success or open the door to painful failures. Good business choices are the foundation of every successful operation. Paradoxically, it often happens that entrepreneurs make crucial decisions for their company without first verifying their doubts or checking potential business partners. Only when cooperation ends in failure and problems become unavoidable do they begin to regret the lack of earlier action.

One of our clients decided to trust their intuition and check a potential business partner. Investing in information turned out to be crucial for them.

‘Trust but verify’ also works in business

A businessman approached Verificators seeking support in assessing the risk of a business cooperation. The subject concerned a publicly traded company, but contrary to initial associations, it was not about investing. The goal was to establish a partnership due to complementary industries in which both entrepreneurs operated.

One might ask – if it’s not about money, why such caution? Our client was highly respected in the business community, so credibility and maintaining a positive image were important to him and his company. So far, he had held several discussions with the CEO of the publicly traded company, but these meetings had sown seeds of doubt in him. The company itself seemed to be in good condition, but its CEO provided very little information. He only spoke in general terms and quickly ended the meetings. This made our client, despite numerous discussions, still unconvinced about the cooperation, and the deadline for making a final decision was approaching in a few days.

Under the KNF’s microscope

After taking on the subject, Verificators’ first step was to check information about the company and its shares on the stock exchange. Here came the first surprise – the company’s shares had been blocked by the Financial Supervision Commission for almost six months. Although the client mentioned that the company’s CEO hinted at “minor issues” with the KNF, our analysts immediately noted that it seemed suspicious that the CEO did not specify the scale of the problem. Upon further investigation, it turned out that the shares were suspended after a disputed purchase of shares by the company’s Vice President.

The KNF matter was complex, and it was impossible to determine how this issue would end. Furthermore, the timeframe for the KNF to issue decisions was indefinite.

CEO in the crosshairs

In the next step, we decided to check the current CEO of the company. Here, things also started to get interesting. Other companies’ CEOs were found in the National Debt Register, some with larger debts, others with smaller ones. It makes one wonder how dire the financial situation is if companies were unable to repay amounts below one thousand zlotys, resulting in entry into the National Debt Register.

In one of the related companies, we also paid attention to the CEO’s other business partner, about whom we also found information about a huge debt, leading to the auctioning of his residence.

Company from Malta

Returning to the main point of interest, the publicly traded company, we noticed that one of the main shareholders is a company registered in Malta. The first association with a tax haven seems obvious. However, what turned out to be most interesting was finding out that behind this exotic company stands the CEO of the publicly traded company himself. Immediately, one can see the narrow scope of control, where we have only one person on the board (the aforementioned Vice President was removed a few months after the shares were suspended by the KNF), who is also the beneficiary of 70% of the shares in the company. This was concerning because the business environment of the CEO seemed to be drowning in debt.

Information gaps

The financial reports of the company turned out to be the final nail in the coffin. Strangely, the last available financial data regarding the company dated back to a period when the CEO had not yet acquired a majority stake in the company’s own shares. After this event, no new report was published.

We focused only on what was available, but unfortunately, the situation was not clear-cut here either. At first glance, the company’s financial results didn’t look too bad. However, we viewed the data with some skepticism because the company had rebranded some time ago, which almost always involves a period of decline and investment to subsequently achieve a higher level. However, in this specific case, the consequences of rebranding were visible for an unusually long time, and what was most worrying was the period when the company started to achieve normal results, only to record huge losses again in the following six months.

What tipped the scales in this matter was the fact that the client was given a specific deadline by which they had to make a decision whether to enter into cooperation or to decline the opportunity. Exactly one week after the set deadline, a report with the current financial data of the company was scheduled to be published. It was hard to believe that this was a mere coincidence, not only for us but also for the client when we informed them about it.

Conclusion of the case

In such matters, it is important to take a cool look at the situation. Despite all the described factors indicating very negatively about the potential business partner, surprisingly, the only advice for the client was not to reject the collaboration outright. We recommended confronting the CEO of the company with this information and also waiting for the list of current financial data of the company.

This case, like many others that have come to Verificators, shows us that only controlled risk has a chance of bringing benefits.

Author: Patrycja Kruczkowska

*Due to respect and safety of our clients, all sensitive data has been anonymized for publication.

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