You’ve probably seen it before: Entrepreneurs go on a reality television show to pitch their ideas, and they walk away with a handshake agreement and a new investor. But, as you might imagine, a lot more goes into closing a deal than a simple handshake.
In fact, a handshake is just the beginning. On investment reality shows, what you see on television is only the start of a long due diligence process that may or may not result in an actual investment or partnership. Here’s a look at why these television entrepreneurs choose due diligence, as well as what specifically they are looking for during the due diligence process.
The Goals of Due Diligence
In general, due diligence is all about gathering as much relevant information as possible before making a significant business decision — whether that be making a key investment, closing a key acquisition or bringing on a key executive. Investors on reality shows have the following goals when they enter the due diligence process:
- Legitimize the Company: A brief pitch on a television show can only provide so much information. A due diligence background check can help an investor better understand the opportunity and confirm what was shared during the brief presentation. Does the company have the experience it claims? Are they doing business as any other name?
- Examine the Numbers: Any entrepreneur can share a compelling story, but it’s important to have numbers that back up that story. A due diligence background check can help uncover those numbers and prove whether or not they support the larger narrative around the business. Does the company have a history of financial issues?
- Uncover Company Culture: Not only are investors investing in the company, but the people running it. A due diligence background check can help reveal the character of the executive team. Are the owners who they say they are? Is there a pattern of criminal activity? Do the owners have any pending litigation?
- Reduce Risk: Due diligence background checks provide a pre-emptive strike to mitigate problems and protect their brand. Ultimately, the investor can avoid negative publicity and avoid embarrassing errors from a bad deal. What factors can lead to a potential fallout?
Of course, a comprehensive due diligence process will return a wealth of information both about individuals and entities, and any one piece of information could be enough to thwart a deal or agreement.
What Comes After the Handshake?
How exactly does due diligence work after television shows? The handshake the audience sees is not contractually binding, but it does launch a lengthy process that doesn’t always end in a deal.
Post-show due diligence starts with confirmation that the entrepreneurs’ claims are accurate. Those who appear on shows will share sales and revenue numbers — the first step is confirming that those numbers are accurate.
After numbers are confirmed and potential investors get other relevant information, both parties have to decide whether or not to move forward. In some cases, the investor still wants to move forward — but the business owners have learned something about the potential deal that makes them want to call off the deal.
How Many Deals Actually Close?
According to investors on Shark Tank, about 80% of deals on Season 7 actually closed. That’s remarkably aligned with the hit rate we see at CS Business Screen, where about 20% of individuals and 15% of companies we conduct due diligence investigations on have a relevant record.
When you’re in need of fast, precise due diligence information, whether on a company or an individual, we’re here to help. Before you make a significant business decision, make sure you have all relevant information by conducting a due diligence background check.