I can’t seem to wrap my head around a bizarre phenomenon in the due diligence background investigation space: lying or omitting information on a background check questionnaire.
So, let me lay out a scenario for you.
The Scenario
A private equity firm is considering making a multimillion-dollar investment into a company. The private equity firm will do its due diligence on the company’s financials, reputation and legal issues. Before the deal is completed, one of the final pieces of due diligence is for the private equity firm to do a background investigation on some of the company’s key principals. The firm likes the business and is ready to make the deal but wants to be sure that the executive team members do not have any significant issues that the purchaser should be aware of. After all, the firm isn’t just buying the company, it is also acquiring a group of executives to run it. The private equity firm has an obligation to its investors not to employ a bunch of felons.
As part of that process, the private equity firm typically retains a third-party investigative firm to conduct some due diligence background investigation on the company’s principals in which it is investing.
As part of that process, the company may provide some forms for the principals to fill out, like an authorization to release information and a background investigation form. The authorization helps with things like employment history and education history. Or, if a credit report is part of the process, which is usually reserved for those in a financial capacity, the release is also necessary.
The background investigation questionnaire asks the executives for some personal information (full name, date of birth, etc.) and information on their personal and professional history, such as names of employers and schools attended. The questionnaire may also ask whether the person has been involved in any civil litigation or bankruptcy cases or has a criminal history.
In any case, the background investigation questionnaire has a dual purpose. The first is to create a concise document with all personal details, and the second is to allow the person filling out the questionnaire to self-reveal certain pieces of information, like a previous DWI, divorce or landlord-tenant case.
Usually, these are solid executives with pristine backgrounds from big-name schools and some high-end professional jobs. These executives have been part of this process before, having worked for some prestigious employers or been the subject of due diligence from other banks or financial firms that have been scrutinized. More often than not, these executives know what to expect.
In other cases, companies have grown over the years from small mom-and-pop shops to small-to-mid-sized businesses, and these professionals have never really been questioned about their background nor been scrutinized by investors or banks.
It’s usually with this latter group that I have seen issues pop up.
Over the years, I have personally seen hundreds of instances where executives have omitted, falsified or misrepresented information. I guess I shouldn’t be surprised, but this is what boggles my mind.
These executives, who have obviously been pretty successful businesspeople, think it would be smart to omit, falsify or misrepresent information on their background check questionnaire submitted to a private investigator.
Mind blown. 🤯
So let’s play this out. When filling out these forms, these executives have two options:
Full Disclosure
So what if you decide to fully disclose whatever your past issues were? I imagine that these executives might be thinking, “What if I reveal personal information that could not be known unless I revealed it to them?”
No matter how bad it is and how much you hope nobody will ever find out, it will probably come up anyway. And if it doesn’t come up, at least you were upfront and honest about it, allowing the executive to get in front of the narrative to explain the situation.
Jason Feifer recently wrote about an employee revealing his past conviction history on his blog. The employee could have told his manager about his background or waited for his manager to discover the news. He chose to disclose the information. The employee owned the information. This way, he could explain it himself and humanize the situation. And he got the job.
Disclose Nothing
On the opposite end of the spectrum, the executive may choose not to disclose anything.
Say the executive has some minor, not-so-significant criminal history or a legal fight with a former business partner or possibly a more serious battle with a former spouse that they don’t want to disclose (maybe their employer doesn’t know about it).
Instead of fully disclosing the information, the executive rolls the dice and hopes nothing is found. Or maybe they think the forms and background check are all pomp and circumstance and aren’t really searching for anything. Or maybe they think the old criminal record was expunged from their record long ago and can’t be found.
So maybe the investigator doesn’t find anything, and the coast is clear.
But more often than not, these issues arise, and now the private equity firm is questioning everything. Now, it’s a matter of trust.
Why would they hide this?
Did they think we wouldn’t find out?
Seeds of Doubt
Just in the past few years, I have seen falsified degrees, unreported disciplinary actions, undisclosed business disputes with allegations of stealing, lengthy criminal sentences with jail time and executives who had been charged with possession of child pornography.
All of these have led to some serious questions about trust.
Sometimes, it is more nuanced, like fudging dates of employment to hide an undisclosed position they were fired from or a period of unemployment or listing professional organizations that they weren’t really a part of. Maybe a military history wasn’t quite what they disclosed.
While these are a bit more nuanced, all the scenarios create a seed of doubt. They create suspicion, leading the private equity firm or investors to question or doubt something previously believed or accepted without hesitation. Skepticism or uncertainty arises in the trust, belief or confidence in a particular situation or individual.
And sometimes, it can lead to a deal falling apart.
Conclusion
As the saying goes, one lie is enough to question all truths.
The most epic example of this is George Santos, who started with misrepresentations and half-truths that eventually led to outright lies, a full-blown criminal investigation and an ouster from Congress.
My suggestion, 100-times-out-of-100, is to be upfront and honest.
Dishonesty, whether small or significant, can plant seeds of doubt that undermine trust.
In business and life, everything starts with trust.