Fleecing the foreigners

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Fleecing the foreigners

A lot of people think of due diligence as something that must be done in large business deals, but is of less importance for individuals in small business deals. If you look at the plight of people who come to the U.S., it is easy to see that this is not so.

Many people come to the United States from abroad, often bringing with them a lifetime of savings and high hopes for their future in the land of opportunity. Unfortunately, their faith in the American way of life, coupled with their unfamiliarity with the system, makes them easy prey for the unscrupulous.

We have seen two cases recently in which families fled their native lands, bringing with them their family’s money to invest. In both cases the results turned out badly because of a failure to exercise due diligence.

Case one: Swampland in Florida

In the first case, prudently working carefully with an attorney, a family ended up buying swampland in Florida. Although in this case the attorney went to jail, the family’s money was never recovered.

We don’t wish to intimate for an instant that all attorneys are crooks. In fact, most of them respect their profession and diligently carry out their duty regarding their clients. However, it is important to keep in mind that attorneys have a lot of your trust, and, in many cases, a lot of control over your resources, and it is important to keep in mind that without trust there can be no betrayal.

In the swampland case, the attorney was a crook and the family was not prepared for this possibility. There was no exercise of due diligence, and nobody unconnected with the attorney actually looked at the land.

The bottom line is that attorneys are human, and, even if you have a lot of money and pull, you need to make an effort to understand what they are doing, and to make sure that whatever is done is what you want done, and that it is done as you would like it to be done. As Lenin said: “Trust is good, but control is better.”

Case two: Overvalued franchise

In the second case, prudently working with an accountant, a family ended up buying a franchise (including in this case the rental of the property and plant) that turned out to be substantially misrepresented and therefore could never make a profit. We are not directly involved in this ongoing case, so we cannot comment further or speculate on what the outcome will be. What we provide, however, are some thoughts on dealing with this type of situation.

Accountants face what you might call the accounting dilemma (we don’t know the accounting term or art). When accounting is dpne or an audit carried out the goal is to make sure that the numbers are internally consistent and make sense, but not necessarily to confirm that they are real. In fact, audits are as much about the process as about the numbers. When clients deceive accountants, withhold or manufacture information, and play “timing games” with the books, the numbers may not always represent reality.

Thus, even though the paperwork might be internally consistent, business transactions call for the appropriate exercise of due diligence, which is the verification of claims that have been made and the recognition, identification, and examination of things that haven’t been stated.

What could this include? If a walk-in business has been legitimately successful, you might want to know about a new highway that will allow most customers to bypass the neighborhood. If you buy a patent you might want to know that it was not current. If you are buying a building you might want to know that the seller doesn’t own it (we know of someone – once called the smartest businessman in America by the Wall Street Journal – who thrice sold the GM building). If you are acquiring technology you might want to know if it has just been replaced by some newer technology. If you are buying land you might want to know if it is above or below the water.

In the franchise case, the accountant trusted the financials, and the family was not prepared for the possibility of their being misleading. There was no exercise of due diligence, and nobody unconnected with the accountant actually looked to see if the neighborhood could support the franchise.

The bottom line is that accountants and auditors are not financial investigators, and make some assumptions regarding the veracity of the numbers they are given. It is your responsibility to make sure that the numbers match what is happening in the real world.

Being taken advantage of isn’t limited by age, education, nationality, sex, religion, or country of fraud. It can – and does – happen everywhere to anyone and everyone, sometimes due to lack of familiarity with local or foreign business practices, and sometimes simply because we are too trusting or too embarrassed to ask for confirmation of facts stated. We wish that more people – particularly people at high risk of being taken advantage of – recognized that the key to successful due diligence is to do due diligence!

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