Laura Otterpohl analyzes how reputational due diligence helps investors dig out crucial information they may never have found

Have you heard the story about the international joint venture (JV) disaster? It starts with two companies of different nationalities deciding to form a JV after several years of co-operating in a B2B relationship. One of the entities, “the foreign company”, has agreed to set up the JV in its partner’s home country. There are teams of lawyers, accountants and consultants overseeing the deal so that it goes off without the slightest hitch. And it does! The JV is perfect, sales go through the roof and everyone lives happily ever after – that is, until it all falls apart.

A rude awakening in the form of an email, and seemingly overnight things take a turn for the worse. The foreign company receives information stating that over the life of the JV, millions of dollars in inventory has gone missing, counterfeit products are found to be widespread in the JV’s home country market, and there are numerous false vendor accounts that the foreign company has been paying all this time. How could this have happened?

Everyone knows the importance of due diligence. It is so important that there are many types: financial, legal, business, operational and HR to name a few. In our JV story, several types of due diligence were done. Yet the risk of bad things happening remained under the radar. How then do we detect these risks? How do we prevent disaster? The answer, in many cases is: reputational due diligence (Rep DD).

WHAT IS REP DD?

Rep DD looks beyond the surface to unearth the “true story” of a business partner. Rep DD can support other types of due diligence in comparing the business partner’s “on-paper” profile with its real-life activity. It identifies any contradictions between how the business partner has presented itself and how it actually behaves and exists in the real world. It’s the difference between what the business partner has told you they do and what they really do.

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Laura Otterpohl is the founder of Lohtsman, a consultancy providing reputational due diligence services