> We always check the corporate registries to see if any of the legal entities the execs of a company are related to are making substantial turnover from either the company we are looking at, or a subsidiary. In 200+ DDs this has happened a handful of times.
Just to add a few points:
- This is much easier to do in Europe where entities are more public.
- I regularly see (probably 1 out of 20 deals) companies where there is some level of a conflict of interest between the owners/management and a 3rd party. The most typical one is where the CTO of a small ($3M revenue) software company also owns the outsourced dev group in India. The implications are numerous here.
A conflict of interest is one thing, but as long as it is disclosed to all parties who might be on the downside of that conflict it need not be a problem in and of itself (but it still could be, and may very easily become one).
An undisclosed conflict of interest is always a problem.
> An undisclosed conflict of interest is always a problem.
Can you help me understand why this is? If a known conflict of interest may or may not be a problem for the downside party why does that change if the conflict is unknown?
I can see how it can become a problem, and how the downside party is at a disadvantage but I’m not understanding why this is always a problem.
Also, this is the classic "it depends" in consulting.
Example where this went bad:
- "Acme Co." has an offshore/outsourced dev group in India called "Offshore Co.". Offshore does all of their software development, maintenance, infrastructure, etc.
- CTO who is employed by Acme wholly owns Offshore Co.
- PE Group ("PEG") buys Acme Co. and takes a controlling interest
- PEG decides Acme should do something strategic.
- CTO disagrees with strategic direction
- CTO operates Offshore Co and decides to hold the company hostage and directs his resources to stop maintaining the code, infrastructure, etc. anymore unless they do what the CTO says
PEG/Acme could simply stop paying Offshore/CTO but since they don't know how the code works, etc. they basically don't have a choice.
Just to add a few points:
- This is much easier to do in Europe where entities are more public.
- I regularly see (probably 1 out of 20 deals) companies where there is some level of a conflict of interest between the owners/management and a 3rd party. The most typical one is where the CTO of a small ($3M revenue) software company also owns the outsourced dev group in India. The implications are numerous here.