Monday, February 23, 2009

In these days of increased economic uncertainty and deteriorating balance sheets, it may be the right time to enhance your due-diligence by reassessing the backgrounds of the management team that you are relying upon to repay your loan or manage your investment.  If you have portfolio loans or investment assets that are described by one of the following characteristics, then it may be to your best interest to update your background investigations and related due-diligence:

1. It is beyond a reasonable "safe harbor" holding period time-frame since the loan or investment was made.  The background characteristics of the subject(s) of the original investigation may have changed since inception.  The nature of the asset (i.e., whether a loan, a portfolio investment or business purchase) and your preference, tolerance or policy with regard to this holding period risk will determine an appropriate time frame for again performing background investigations on the relevant parties.  My suggestion is that the appropriate term to update the background investigations be one year, absent a compelling reason, below or otherwise, to update them sooner.

2. You are financing or invested in industries that, during this economic downturn, are more susceptible or vulnerable to asset value and cash flow fluctuations.  Certain industries are being impacted to a greater extent than others during these difficult times.  The current economy can also have a very negative impact on the "other investments" of your borrowers or stakeholders that may be involved in adversely affected industries.  The resulting stress can directly or indirectly impact your borrowers or investments, the result being the usurpation of managements' time and/or money from the businesses that you have financed or invested in.

3. Your loans or investments are beginning to show stress because of slow sales, inventory turns, accounts receivable collections or other tendencies that indicate a change in a normal business profile.  The resulting stress brought upon the management or owners of the company that you are a creditor to or investor in can have a direct or indirect and negative impact on your loan or investment because of the usurpation of time and/or money by the management or owners from the business.

4. Your investments are owned by individuals or entities that are involved in multiple businesses in diverse industries across diverse geographic boundaries.  Multiple investments by the management or owners of the companies that you are a creditor to or investor in, especially across diverse industries and geographies (whether domestic or foreign), can put extra financial stress on your loans or investments in these tough economic times because of the usurpation of time and/or money by the management and/or owners of the companies in which you have made a loan or investment.

5. There has been a change in management or control of the business since inception of your loan or investment.  Therefore, the background investigations of the current management team and/or owners may never have been performed.  Simply put, if a background investigation was not previously performed as an aspect of your initial due-diligence, then the time is now to complete the task.

6. You are involved in a workout or restructure of a loan or investment.  In this instance many changes may have occurred in the background of the management team, or owners or asset composition of your loan or investment since inception. The result could lead to a serious compromise in your negotiating position or your loan or investment structure.  Therefore, now is the time to perform an asset search in order to determine if assets have been compromised or moved to the detriment of your loan agreements, collateral or investment position and/or to perform a background investigation to determine if the managers or owners are involved in other businesses that may be attracting their time and capital, adverse to your interests.

In summary, the advancement of time and the changes in the economy and management and business owners' circumstances may bring with it indicators or predictors of nefarious activities that could impact your loan or investment.  If any of the above characteristics fit your current situation then a 1stWEST background investigation in the form of a Risk Profile Report or Asset Recovery Report is your solution.

Relevant to this topic, please read also my recent article in the ABF Journal that addresses the current need to adopt Enhanced Know Your Customer/Borrower Requirements, accessible by clicking here, IN MODERN TIMES...Know Your Customer Regulations - Take on a Higher Meaning.

Wishing you much continued success,

Jerry Oldham
Chairman & CEO

Risk Profile Report and Asset Recovery Report are registered trademarks of 1stWEST Financial Corporation.