How careful due diligence is an essential—and sometimes overlooked—part of investing in new markets.
In its exploration of the dynamic American cities profiled in this issue, the Worth editorial team considers a wide range of characteristics that make a city an ideal place for businesses to prosper and for its executives, employees and their families to thrive. They consider things including quality of life and cultural attractions as well as key aspects of the business climate, such as workforce, innovation and access to education. Executives who are exploring business relocation, mergers, acquisitions or investments in new markets for their firms also need to think of issues of security and risk—be it reputational, regulatory or legal. Clients often engage our firm to perform extensive due diligence in these situations, so I view everything through a security- and risk-focused lens.
Our work with clients involves building a risk profile of the new environment using various experts, data sources and investigative techniques. These intelligence-based risk assessments are highly valuable because they often bring to light considerations that a business might have otherwise overlooked before they make a decision that will have long-term consequences. They allow executives to make informed decisions involving the move or investment and help the company make strategic choices while planning and executing.
When you enter a new market, you’re not just buying or investing in a company in a city. In many ways, you’re investing in the city itself. That means you need to take evaluating the city, its merits and its weaknesses, seriously. When you build a custom home, you surround yourself with a team that includes not only an architect, but also a designer, lawyer, insurance professional and anyone else crucial to the process. Similarly, when you evaluate a new market for your business, you need to build a multidisciplinary team (including expert resources with perspectives on finance, human resources, legal, IT and of course security), whose members can bring their unique points of view to the process.
This analysis can start with crime, because safety, security and corruption issues impact both a city’s reputation and its business environment. A crime-risk analysis with an emphasis on the protection of your people and property can help you make educated decisions when considering new markets.
Part of the evaluation should be a report that is similar to a geopolitical-risk analysis when evaluating foreign markets. What’s the political situation there? Corruption level? Is there political unrest? Will your company and products be welcomed to the market? Evaluating similar risks domestically is just as important. Expansion into a new area brings new government and regulatory relationships that need to be researched and navigated proactively. A responsible executive should ensure that the necessary due diligence is performed in order to gather the required intelligence about the local government’s regulations and leadership, as well as the market’s overall historical view of your business sector.
Another vital factor to consider is a market’s workforce and the conditions surrounding it. Does the local education system—not just the collegiate level and specialized education, but K–12 as well—support businesses by supplying educated local talent? Are the young people staying local to find work or moving elsewhere?
An evaluation of the workforce should also consider the pool of executive-level talent in a market or the backgrounds of the current executives within a company you’re acquiring. Whether you’re expanding an existing business into a new market or investing in a venture, you will need leaders with experience and relationships in that local market. Firms should vet not only those executives’ past business performance but also any local controversies or conflicts that might affect their reputation.
Their financial and reputational weaknesses will become your headache when the merger or acquisition is complete.
A detailed evaluation of a market’s business environment is another key factor of the risk assessment process. As a responsible executive, you are not just evaluating your peers and competition—moving to a new area brings with it a host of new contractor, supplier and consulting relationships, and you need to strategically think about how those can pose legal or regulatory risks to your company and what the related workplace and cybersecurity risk exposures might be. Thorough diligence ensures that local partners have operated in the past with the highest integrity, and operational, physical and cybersecurity standards ensure that these partners will operate at the same high caliber that your firm does going forward.
Expanding, relocating or investing in a new market is inevitable for growth companies, but it’s critical they make educated decisions using the best possible intelligence.