Tag: EDC

As more Tribal Nations use Economic Development Corporations (“EDC’s”) to take on larger and more sophisticated investments, it is necessary to develop an equally sophisticated due diligence process.  This process must go beyond simply investigating the transaction and expand to seek a thorough understanding of the operations and infrastructure of the Company as well as the impact of any transition with ownership and/or leadership.

A company’s value is based on its ability to sustain and improve cash flows while managing business risks.  Ownership and leadership transitions create risk to the company and its cash flow.  Crafting a due diligence process that helps the Tribe understand the factors in the business that impact cash flow, stability and growth opportunities (and how a transaction would affect these) will help protect the Tribe and increase the likelihood of a successful acquisition.

Why is due diligence so important?

Due diligence is a process for doing a thorough investigation to better understand the investment and identify potential risks and opportunities while validating that the purchase price will allow the new entity to meet the required returns.  For the most part, due diligence seeks to accomplish three things:

1. Validate

First and foremost, due diligence is there to verify that the information provided by the seller is truthful and correct.  This includes the financial statements (or any adjustments thereto), contracts, legal documents, operations of the company, or the legal standing of the company.  This part of the due diligence process verifies the basis for the purchase price.

2. Understand Risks

Second, due diligence should be used to understand, assess and qualify the risks associated with the investment opportunity.  Some examples of potential risks to examine are:

• Will an ownership change have an impact on the ability of the company to perform as it has in the past?
• Who are the key personnel who understand and can manage the operations on a day to day basis?
• What is the risk of losing key staff with a change in ownership?
• Does the remaining management and/or ownership share the EDC’s vision for the company moving forward?
• How vital is the company to its customer base?  How strong is the supply base?
• What will be the capitalization requirements for the company at closing and into the foreseeable future?

3. Prepare for Transition

Third, due diligence helps develop a plan for the transition, or post-merger integration, of the company into the Tribal EDC’s portfolio.  Some key things to consider include:

• Is it possible to mitigate or eliminate any of the risks identified during due diligence with the transaction closing and transition?
• What legal jurisdiction and UCC code will the new entity operate in?
• What are the tax implications of these decisions?
• How will key strategic decisions be made for the new entity once they are under the management of the EDC’s holding company?
• What changes will need to be made to the new entity’s operating agreement, HR policies and financial systems in order to keep it in compliance with the EDC’s requirements?  This is especially important for Federal 8(a) contracting companies.

The importance of a strategic plan:

While the steps mentioned above are extremely important, they become nearly meaningless if the EDC does not have a thorough strategic plan to guide the acquisition process.  A strategic plan provides direction and structure to the complicated task of performing due diligence by:

• Outlining the investment criteria (i.e. – controlling interest requirements, industry or sectors to be sought out or avoided, minimum expected  returns, etc).
• Alignment of key stakeholders and set the expectations of any investment (does the due diligence show that the projected future performance meets the expectations set by the strategic plan?).
• Define the priorities of the due diligence investigation (emphasis on financial, operational, leadership, future opportunities, historical results, etc).
• Define how due diligence will be coordinated and who is involved in the approval process.

Any investment, especially a direct investment in an operating company, is an exciting but complicated process.  Due diligence is a key factor to provide an investment the best chance of succeeding and providing positive returns.  Having a strong due diligence process, transition plan, strategic plan and qualified advisors in place before an acquisition will help ensure an EDC obtains all necessary information to make a well-informed decision.

Last week, DWH traveled to Portland, Oregon to attend the 37^th Annual Native American Finance Officers Association (NAFOA) Conference. The NAFOA conference provides attendees with opportunities to “engage directly with tribal leaders, professionals, and influential federal agencies about economic and financial issues facing Indian Country.” (nafoa.org). Attendance at this conference is crucial for DWH because our majority shareholder is Waséyabek Development Company, LLC (WDC), the economic development arm of the Nottawaseppi Huron Band of the Potowatomi. The conference is a chance to not only connect with members of our Tribe, but to also meet other Tribal members throughout the nation and share our experiences working in economic development.

The two-day event was packed with sessions, panel presentations and cultural activities for attendees. DWH Managing Director (and former WDC Board Vice Chair) Clayton Vanderpool participated in a panel that focused on how to create a foundation for a Tribal Economic Development Company (EDC) that would set it up for future success.

WDC and DWH are proponents of following the Harvard model as a best practice when it comes to creating stability for a Tribal EDC. This structure coupled with a consistent and open communication schedule will help create stability for the EDC and ensure the Tribe’s mission, vision and values are being maintained.

Key Points in Creating a Tribal EDC:

1) Before making any investments, a Tribal EDC needs to define what it IS and what it is NOT. Examples would be deciding if it wants to invest in startups, act as venture capital firm, make passive or private equity investments, or pursue an SBA 8(a) certification and provide products and services to the federal government. It must also determine funding sources and resources it is comfortable using.

2) Tribes need to define a decision-making process and the various levels of authority for the EDC’s subsidiaries, CEO, and Board of Directors. Ultimately it will need to decide at what point the Tribal Council’s and/or Board’s approval will be required on transactions or strategic decisions.

3) The EDC needs to take the investment parameters and funding resources and generate a financial model showing return and risk scenarios. The purpose of this model will be to ensure the investment philosophy and resources available will create a return that meets the Board and Tribal Council’s expectations. If the model and the results do not meet expectations, then one (or even all three) of the inputs (investment criteria, funding/resources and expectations), will need to change to ultimately create strategic alignment throughout the organization.

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