War Story Wednesday: Are there really that many fraudulent deals out there?

January 17, 2024

by a professional from Harvard University - Harvard Business School in Atlanta, GA, USA

YES! 40% of the deals I worked on in 2023 had fraud. And I saw one of the most blatant cases I’d ever seen…

The deal was for a professional services company.

We ask for invoices to support the revenue. Easy ask…NO! The invoices add up to $1M less than reported revenue. We ask…and ask….and ask… for invoices. 4 weeks later - no invoices.

We heard every story. The invoices are on paper. They’re in his office. He can’t go get them. Blah, blah, blah. You see where this is going. The invoices never surfaced.

So the question of the whole QoE is: “Where exactly did that million dollars come from?”

It was FRAUD. And I’ll die on this hill. The Seller had deposited $1M into his bank account - called it revenue - and had no invoices to support it. He was hoping he didn’t encounter the King of QoE (lol).

Had we not pressed, this client would been RUINED. Buying a business you think has $1M of EBITDA to find out it as ZERO is instant bankruptcy. BIG BAD.

Here’s the scary part —

If the QoE provider had just done the bare minimum—took a look at QuickBooks and bank statements without checking invoices—they wouldn’t have seen this BLATANT fraud.

That would have been a $3 million dollar crater (3x that $1 mil) that ANY buyer could have walked into.

Don’t let up folks! QoE or not, if you smell something is off, press for the backup data. Be patient enough to wait for it. Don’t believe that the invoices are in “27 boxes on paper that can’t be scan nor sent”. You know a pile of dung when you see it.

Trust but verify. Keep verifying until you’re ok with a million dollar guarantee. If you never get there, that’s not your deal. Kill it. Live to buy another day!

Key takeaways:

➡️ There are legit cases of fraud in the #SMB marketplace.

➡️ Diligence should go deeper than financials.

➡️ Always check the seller’s work. Income statements can lie.

Reply by a searcher
from IMD in Amsterdam, Netherlands

You are right, there is a lot of dodgy activity out there. Asset holders need to avoid making mistakes. Here is a guide for reference: Most investors make the same 10 fatal mistakes when attempting to monetize their assets!.. Fatal mistake #1. Skipping due diligence on the geography we must ensure that the transaction occurs in a jurisdiction with clear and transparent regulations to safeguard your interests. Avoid non-cis compliant geographies where legal recourse may be limited or complex. Fatal mistake #2. Ignoring the origin of funds and assets verification of legitimate source of the funds and assets involved in the transaction. Avoid assets with unclear origins or those suspected of having criminal or fraudulent connections. Fatal mistake #3. Undervaluing the assets recognize the true worth of the assets being monetized. These systems and programs are designed for large-scale transactions, typically exceeding $100 million. Avoid assets with a total value too low to justify the complexity of the process. Fatal mistake #4. Relying on unverified banking information obtain accurate and verifiable banking officer details. Be wary of fake or incomplete banking information, as this could indicate fraudulent activity. Fatal mistake #5. Falling for upfront fee requests Refuse tp [ay upfrnt fees without seeing performance. Monetization transactions occur in days to weeks so no one should be requesting upfront fees. Fatal mistake #6. Engaging in high-risk transactions assess the inherent risk associated with the asset or transaction. Avoid high-risk assets, such as those not in safekeeping or those with poor credit ratings. Fatal mistake #7. Bypassing reputable institutions conduct transactions through established and reputable banks. Avoid working with institutions outside of the top 100 banks, as they may not have the necessary safeguards or transparency. Fatal mistake #8. Accepting forged documentation scrutinize all documentation thoroughly. Carefully check dates, signatures, and other details to ensure authenticity. Avoid fake documentation that could jeopardize the transaction. Fatal mistake #9. Neglecting asset inspection involve a qualified professional to inspect valuable assets, such as precious stones or metals, before transacting. This ensures the asset is genuine and accurately valued. Fatal mistake #10. Dealing with unauthorized intermediaries ensure you are dealing directly with the asset owner or provider, or their authorized representative or intermediary. Avoid intermediaries who lack proper authorization or credentials. …and the list goes on !

Reply by a searcher
from Indiana University in Atlanta, GA, USA

Well said. I had a seller who kept emphasizing that they're good, church-going Christians. They're pillars of the local community. There's no way they would be dishonest. Any discrepancies that I saw would have a good explanation behind them...just trust them and keep moving forward with the acquisition. I went along for a short time, but then started insisting on the backup and explanations, and things quickly unraveled at that point as I saw the data didn't match up with their stories.

+17 more replies.

Join the discussion