Investment decisions, especially those involving large amounts of capital, require more than intuition or optimistic forecasts. While risk is an inherent part of any investment, many risks can be identified and mitigated if a thorough and in-depth due diligence process is conducted.
Due diligence is not just an analysis of financial statements or verification of a company’s condition at the balance sheet level. It is also an assessment of the quality of management, transparency of operational processes, legal compliance, as well as the company’s reputation and personal and capital relations. It is often these ‘soft’ aspects that conceal the greatest risks – especially if the company to be invested in operates in a highly regulated industry or in a difficult market environment.
Risks hidden behind good financial performance
Many investors focus solely on the numbers, assuming that good financial performance is a guarantee of stability. However, even a seemingly strong company can turn out to be risky if its key counterparties default on payments, it is involved in hidden litigation or it has relationships with entities of questionable reputation. It is also sometimes the case that companies deliberately ‘powder’ their situation for the purposes of investor presentations – altering the timing of payments, withholding material information or presenting inflated forecasts.
A professional due diligence process should therefore include not only a financial analysis, but also a thorough check of the legal environment, the history of the owners and board members, links to other entities, as well as the reputation in the industry. On this last point, analysis of open sources – media, records, opinions of former employees or contractors, as well as analysis of the entity’s online activity – can be crucial.
Hidden risks and non-financial data
Modern due diligence is based not only on financial documents and public records, but increasingly on a wide range of contextual information. It is becoming important to skilfully combine data from a variety of sources – from court records, to analysis of ownership relationships, to verification of a company’s presence in trade media or market opinion. It is in such less obvious areas that the first warning signs are often hidden: an unstable ownership structure, unusual business connections or recurring negative mentions that may indicate reputational or operational risk. Good due diligence today is the art of reading between the lines.
How do you recognise the warning signs?
Many risks can be avoided if you pay attention to so-called warning signals. Sometimes they are subtle – such as inconsistencies in registers, repeated names in different companies or unusual changes in ownership structure. Other times they are more obvious – such as a lack of financial transparency, excessive management turnover or a history of conflicts with partners.
This is why effective due diligence does not rely solely on checklists. You need analytical thinking skills and the right tools to gather and interpret data from a variety of sources. Increasingly, it is no longer just about public data – traces in industry media, forums, foreign registers or environmental reports can also be relevant.
Our experience
At Verificators, we have been supporting clients for years in carrying out in-depth analysis of entities of investment interest. Our experience shows that most irregularities come to light precisely where everything looks correct at first glance. Reliable due diligence is not only a form of security – it is also a competitive advantage. A well-informed investor is an effective investor.
In a world where the pace of business decisions is accelerating and risks are becoming more complex, the thoroughness and depth of analysis cannot be underestimated. It is therefore worth investing time and resources in professional due diligence – so that not only do you not miss out on risks, but more importantly, you can make fully informed decisions.
Author: Patrycja Kruczkowska
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