TLDR:
- M&A dealmakers are intensifying their focus on founders’ background checks to mitigate risk in 2024.
- Thorough background checks provide essential information to help avoid unforeseen exposure.
In 2024, managing investment risk is a top priority for M&A dealmakers. Background checks on founders and key management of potential target companies are becoming increasingly important to mitigate risk. Drew Seaman, managing director of Hunt Scanlon Ventures, emphasizes the significance of talent screening in the diligence checklist of dealmakers.
In the VC world, the importance of due diligence prior to investing is recognized, not just by venture capital firms, but also by private equity operators and strategic buy-side teams. Michael Karran, a managing director of Mintz Group, highlights the critical role of human due diligence in the M&A process. With competition for deals on the rise, compressed deal cycles leave less time for traditional due diligence, making background checks on founders and key management crucial.
When conducting background checks, investigations typically cover various aspects such as civil, criminal, tax, or bankruptcy litigation involvement, regulatory enforcement actions, controversies in the media, and verification of employment credentials. These checks help deal teams gain a deeper understanding of the management team, assess potential red flags, and make informed decisions about investments.
Furthermore, the Mintz Group’s checklist extends beyond verifying information to identify warning signs and provide insight to guide management teams post-close. Successful M&A deals often involve identifying essential talent for retention during due diligence, highlighting the value of human due diligence in assessing cultural fit and minimizing potential risks. As the M&A market shows signs of rebounding in 2024, the focus on founders’ background checks as a risk mitigation strategy is expected to continue to grow.
