The Due Diligence Series : Follow These Basic Rules and Get Out of Trouble BEFORE it’s Too Late

“Diligence is the mother of good fortune, and idleness, it's opposite, never brought a man to the goal of any of his best wishes.” – Miguel de Cervantes -
Many people these days are finding new niches to invest in. Many of them great, but many of them questionable. It’s easy to go back and forth and around in circles on prospective investment deals but it might be helpful to know: What can you do about it?

It’s called due diligence or thorough analysis.
Here is the Definition:

1. The disclosure to potential buyers of all relevant information that applies to a security issue.
2. the degree of care that a prudent person would exercise, which is a legally relevant standard for establishing liability.

OK! How do you do it? The balance of the information in this newsletter is here to help you do your due diligence. How much time and money should I invest in qualifying any possible investment or speculative offer? Here are some basic rules that have been faithful to me. I will expand on them later on.
Basic rule #1: If it’s too good to be true, then 99.99% of the time, it is.
Save your time, money and heartache and just walk away.

1. The greater the percentage of your total net worth the investment demands, the greater and more thorough you must be in your analysis. If you have $1,000,000 saved up, a $5,000 risk should not need to consume too much time. But anything over 2-5% needs a good, hard look.
2. Keep digging and asking until you are satisfied. If you can- not get the information you need to qualify the investment as an investment, walk away. There are 100 more just like it coming down the road. Do not accept “explanations” from promoters. Get the facts. Don’t just look for their information that only confirms what they are telling you. They will never tell you or show you the deficiencies, weak points, fabrications, etc. It’s important to know that they may not know them themselves.
3. If you don’t feel qualified to do the research, find some help. Do not get intimidated by fancy calculations, big investment concepts and fast-talking promoters promising you fantastic returns. Have someone you trust to be impartial and who is educated in this field side-check your research before you finally dive in. Listen to them! Even if you have to pay for an outside review, it is worth every penny if you cannot be objective yourself.
4. It is fair to ask any question and verify anything presented to you as fact. When someone gets mad or impatient at you for asking questions, most of the time that’s a bad indicator. If it gets emotional or confusing and you can’t unravel it, walk away. Don’t be intimidated – it’s your money.
5. Keep in mind that you are looking for a solid investment. The product is that you are secure, you will get your capital back, plus a return.
6. Keep everything in writing. Build a file. Keep all your emails, spreadsheets, papers, analysis, etc. No verbal guarantees or promises. If someone says, “I promise...,” then get it in the contract.
7. Have your attorney draft correct legal documents. Do not try to be an attorney yourself. Correct wording and clear, complete concepts are vital to good agreements. I have mediated dozens of failed deals simply because the agreements were so poorly written (when written at all) and misunderstood. Find out how much money they are trying to raise. If they need $1M to make it all work, you don’t want to be the first $200K in the door. If they never raise the other funds, but spend your investment – you’re screwed. I guarantee they will come back to you, “Put more in or lose what you already put in.” Find out who else is investing and how much.
8. There is ALWAYS another deal. If it doesn’t stand up to the full sniff test, let it go.
9. 10. Never allow yourself to be rushed or pushed because of some time limits. If that is being pushed at you, walk away. Take the time you need or leave it alone. Do not be rushed.
10. Use the Investment Checklist to help direct you to the answers. (Contact W&B on how to obtain a copy of the Investment Checklist.)

The more of these rules you apply and the more thoroughly you apply each one them, the more well-informed you will be and the better your chances of making a rational decision based on research and not emotions.
I hope these helped you ease some of your stress or anxiety on investments, and I hope you share them and use them in the future.
Our next blog will go over valuations. What is the value of the proposed investment? How much do you have to give to get more in return? That is if you do end up getting anything in return. We’ll help you get this sorted out!
Subscribe to our blog at www.wiseman-burke.com and stay updated!
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