Assessing Management Transparency

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November 10, 2020

by a searcher from University of Calgary in New York, NY, USA

I've found that one of the most important, though often difficult, areas of diligence is assessing management's level of transparency. While this often becomes evident during the course of normal due diligence, I'm wondering if anyone has any deliberate techniques for assessing management transparency?

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Reply by a searcher
from University of Vermont in New York, NY, USA
It's all about the time speaking together and constantly confirming things management says. Once I worked with a general counsel who used to ask the sellers of the companies I was trying to buy the same questions over and over again, though often in different ways. At first I was put off by the approach because I thought it was obnoxious. But I came to appreciate it very much--and indeed missed it when it was gone--because it was a way to ferret out consistencies or inconsistencies in the stories.

I have a ton of experience and I am still learning and still being surprised by what I learn. Three years ago we bought a company owned by two partners (65/35). I had gotten to know the guys and the company over a seven-year period. It took over a year from LOI to closing (various reasons, none germane) and we thought we knew them very well. About four months after closing I got a call from the 65% owner-partner saying he wanted to leave the company. He used as an excuse that his father was ill and dying. I offered a leave of absence or whatever he needed to get through his situation. He said he just wanted to leave. OK, I said. And then I called his partner to try to get some more background, but his partner had no idea and was just as surprised as I was. Of course, I was even more surprised that the guy hadn't even told his own partner. I learned soon after that these two guys could barely stand each other, which they disguised very well. I never had an inkling.

There's no substitute for constantly having your gold-plated BS detector on and running and trusting your gut. It's also helpful if you have one or more partners or people invested in the process and you constantly checking to confirm you are hearing the same things...or at least understanding what's different.

Bottom line: There are no magic bullets with assessing transparency or judgement. Good luck.
commentor profile
Reply by a searcher
from University of Calgary in New York, NY, USA
Thanks for your thoughtful response, Doug!
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