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As seen in the December, 2006 issue of ‘abf journal’, a monthly trade journal for commercial finance professionals.


Know Your Funding Prospect:
Due Diligence, Background Checks, ‘De-Risk’
Potential Opportunities

by Joseph A. Genovese

The essence of any business funding transaction is to ensure that all risk factors have been thoroughly assessed, evaluated and mitigated. Capital Preservation for the Lender, Factor, Private Equity Investor, Distressed Equity Investor etc. is paramount. The protocol, process and execution of the Due Diligence (Vetting) process by the Funding Source will dictate how successfully the impending funding transaction has been de-risked.

   High end Background Profiling (investigation) as a component of the vetting process is rapidly emerging as an underwriting requirement rather than an available option. Investigative research organizations specializing in comprehensive, high end intelligence gathering resources are becoming a solution based facility used by the Funding Sources to effectuate independent, unbiased, investigative background research of the principals and senior level management team of the Funding Prospect.
   Funding Sources are recognizing the significance of accurately knowing the “background” of the “Key” individual’s that are responsible for the financial health and growth of the Funding Prospect. The goal of the investigative research firm is to accurately “Profile” the target of the search with the objective of creating a character, financial and integrity snapshot of the target. The process of creating the “snapshot” involves the assimilation of information ranging from onsite public record research to high end complex procurement of “hard to find” information.

  • Legal issues: liens, judgment, suits, bankruptcy, etc.
  • Character issues: criminal history, sex offender, media attention, etc.
  • Financial issues: business successes/failures, property, credit performance, etc.
  • Professional History: employment history, professional designations, education, etc.

   The aforementioned components are the foundation of a well constructed “Profile”. Findings of significant interest such as past business failures, financial distress, history of prior criminal convictions/arrests , multiple lawsuits, DWI’s, associations with individual(s) of “suspect” reputation along with a myriad of other findings lead to the crafting of the “Profile”. The previously undetected findings can influence and motivate the Funding Source to “rethink” the transaction and, in some cases, reverse the approval.
   The utility of the “Profile” is measured in terms of how the Funding Source applies the findings in terms of the influence on the funding decision. The Background “Profile” takes on an additional level of importance when viewed in terms of “reputation” risk. The reputation of the Funding Source can be compromised and impaired if funding transactions are arranged then closed with business operations (borrowers) spearheaded by individuals of substandard reputation either by their own actions or through association with others of undesirable character.
   In a recent probe and profiling conducted by my organization, (RSI) revealed interesting but disturbing details of the principal of a company soliciting a debt capitalization (over $15 million dollars) from our client, an inventory financing asset based lender. The individual enjoyed significant earnings, an impressive portfolio of assets and a seemingly healthy reputation. The unanticipated results triggered a fire alarm when it was learned that the “Profiled” target’s history included a “Sex Offender” conviction and a media publication referencing a prior history of mental illness which originally was uncovered from his participation civil disturbance matter. The “sirens” were activated when we discovered information regarding the financial collapse of several businesses that the “Profiled” target controlled over the previous (10) year period resulting in significant financial losses for a number of creditors, vendors and shareholders.
   The decision to fund the seemingly creditworthy and well collateralized transaction to the funding prospect came under significant scrutiny by the senior underwriter of the Funding Source ---eventually culminating in a denial of credit. The underwriter relayed to us that the information discovered on the principal was evaluated and lead to the decision that their (Lender) reputation and underwriting standards could not be compromised by engaging in business with an individual of deficient ethics and a distasteful background. The cost outlay to the Funding Source for underwriting the transaction was already in the thousands (field examination, appraisal, audit, attorney documentation review etc) but the opportunity cost of “reputation loss” outweighed the potential rate of return of funding the transaction. “Reputation” is undoubtedly regarded by the Funding Source as a critical “intangible asset” for their organization hence providing further validation of the significance of incorporating “Background Profiling” as a requirement of the underwriting process.

   The saying that “a business takes on the personality of the owner” is gradually receiving additional acknowledgment by numerous Funding Sources resulting in the implementation of an exercise process to assess the principals and senior management of a Pre-Funding transaction. If the principal is unethical and unscrupulous then it is reasonable to conclude that the business will follow suit. Employing the resources of a credible “Background Profiling” organization that specializes in high end, complex investigations is an invaluable, off balance sheet asset for the Funding Source. This is especially true as the time frame for originating, underwriting, due diligence, approval, closing, and funding by the various alternative funding sources is under heighten, increased pressures to shorten the timeline of the transaction. The proliferation of competition between various alternative Funding Sources waging battle for funding opportunities poses the potential for “deficient” and “substandard” implementation of comprehensive research mechanisms for ascertaining the backgrounds of the people “running the show and pulling the strings” of the funding target company. This leads to the importance of an independent, unbiased “Background Profile” evolving as a mandatory compliance requirement of the underwriting evaluation process. The “Background Investigative Profile” is still perceived by some Funding Sources as an unnecessary tool but this “unconventional” form of due diligence is receiving a material increase of attention and application by “Funding Sources”.
   Unfortunately, the first post-funding transaction that tanks because of deficient due diligence usually serves as the catalyst for incorporating the “Background profile” as a requirement and mandate of the underwriting process.
   Post Funding transactions are monitored through an internal “compliance” exercise by the Funding Source and is employed in a myriad of ways. “Performing” investments of the Funding Source can suddenly and materially reverse fortunes and emerge as underperforming or nonperforming. It is critical to the investment monitoring process that changes in High Level Senior Management of the Funding Target precipitate an appropriate level of investigative discovery of the background of the incoming key personnel. The preservation of the capital (investment) of the Funding Source is always in the forefront of any business funding transaction. Accepting this as pivotal element of Capital Preservation then there should be a compelling reason to react to key management changes of a Funding Target by requiring immediate, diligent probing and discovery of the background of the individual.
   A recent screening handled by my company for a Asset Based Lender involved the “vetting” of an individual whom had been residing in the states for (5) years and had previously resided in Canada, Germany and France over a (15) year period. The individual was hired by the Funding Target to replace the ousted CFO. To complicate matters for the Asset Based Lender there was a “pattern” developing that led to major concerns based on loan performance and “hearsay” that the company was ripe for a major hemorrhaging. The hiring of a key component of the success and fortunes of the funding target were recognized by the Lender as crucial which led to my companies’ engagement to review the individual background.
   The process was done on an “informed basis” (individual was aware of the search) as the Lender alerted the funding target and secured approval. The search involved investigation in the CFO’s previous domiciles which involved international investigative work. The findings of the “Profile” surprisingly reveled that the “CFO” was having “eye catching” financial difficulties and other findings uncovered his previous affiliation with a failed, highly publicized business in Ontario, Canada along with a revocation of his license to practice law. The most startling finding was that of information located through a (6) month old media publication that the CFO had been committing illicit and corrupt activities within the business that eventually caused its implosion.
   The web of deceit and concealment of pertinent background details by the CFO led to an aggressive audit of the Funding Target’s financial and operational activities by the Asset Based Lender. The “Background Investigative Profile” proved to play a role in assisting the Funding Source in supporting its efforts for Capital Preservation of its investment.
   The use of “Background Profiling” on a Principal or Senior Manager of an Investment opportunity is receiving increasing importance as a vital component of the underwriting process. Qualified, credible investigative research organizations provide an invaluable mechanism for the Funding Source to employ as relevant form of “de-risking” an investment opportunity.

Joseph A. Genovese is the president and founding principal of “Research Specialists, Inc.” based out of Metairie, Louisiana. The company was founded in 1993 and is an active contributor in civic functions focused on the revitalization of New Orleans. Mr. Genovese has a diverse professional background with his roots based in Commercial lending Underwriting, Originations, Loan Workouts, Asset Management and Real Estate Management.

12 | abfjournal | December 2006

The saying that “a business takes on the personality of the owner” is gradually receiving additional acknowledgment by numerous Funding Sources...If the principal is unethical and unscrupulous then it is reasonable to conclude that the business will follow suit.


Business Capital Risk Control Services, LLC
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