As more Tribal Nations use Economic Development Corporations (“EDC’s”) to take on larger and more robust investments, it is essential to develop an equally robust due diligence process. Before entering into any business agreement, it is always wise to “look under the hood” in order to see whether a proposed deal is truly a good one. Just as one might hire a mechanic to perform a multi-point inspection on a used vehicle before purchasing, tribal EDC’s looking to make a business deal stand to benefit from assembling a team of advisors and legal experts to inspect all aspects of an acquisition.
What makes for a strong Due Diligence process?
Due diligence means “required carefulness” or “reasonable care” in general usage. In the world of business, a strong due diligence process will provide a thorough understanding of all potential costs, risks, and opportunities involved in an acquisition or transaction. Additionally, a strong process will provide a roadmap for how to effectively think through integrations, taking into consideration the people, systems, and processes. The major components of the due diligence process typically include:
- Examining the target company’s operations and infrastructure.
- Identifying strategic initiatives and impact
- Analyzing financial performance and forecasting performance post close
- Planning for successful transitions among ownership and key leadership figures
- Identifying post-merger integrations (strategy development, project management, etc.)
- Gaining insights from a competitor analysis
- Proposing a detailed plan to help mitigate risks and maximize opportunities throughout the acquisition process
Why is Due Diligence so important for Indigenous Nation–Building?
A sound due diligence process is vital for economic development initiatives as it will ensure alignment with tribal investment philosophies, help tribal nations understand the impact of cash flow, stability, and growth opportunities, and reveal the true value of an acquisition. Most importantly, it will strengthen and protect tribal sovereignty by ensuring sound investments, which in turn, can lead to a more sustainable future for both the EDC and its stakeholders — especially tribal citizens.
A strong due diligence process can also reveal opportunities to learn from the frameworks of other tribal EDC’s or even reveal possibilities for tribal partnerships and shared economic development objectives. As a native-owned consulting firm, we’ve had the unique opportunity to facilitate some incredible collaborative growth efforts among our tribal partners.
Understanding the Due Diligence process further
To review, due diligence is a process of conducting 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:
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 the 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 will the leadership structure look like for the new entity once it is under the management of the EDC’s holding company?
- What legal considerations should be taken into account? What are the tax implications of these decisions?
- 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.
- How will the acquisition be contributed to stakeholders (customers, employees, vendors, tribe, etc)?
- Are there any commercial advantages available to the company once it is tribally owned?
Any investment, especially a direct investment in an operating company, is an exciting but complicated process. Due diligence, transition planning, and strategic planning are all foundational steps to ensuring an investment has the best chance of succeeding with positive returns. Additionally, having qualified advisors in place will help ensure an EDC obtains all necessary information to make a well-informed decision.
As a native-owned consulting firm, DWH has extensive experience supporting tribes with their portfolio management and economic development objectives.