Nuggets for Due Diligence

One of the many benefits of my career is that I get a chance to interact with, learn from, and often provide advice to extremely experienced and seasoned investors. These last few days have been no exception. I’ve picked up a couple of nuggets that I want to pass on to you when it comes to doing essential due diligence.

The first nugget is that you only want to do business with individuals who are current on filing their federal income tax returns. By current, I mean that they have a valid extension pending for any year that has not yet been formally filed. For example, in 2023, they may not have filed their 2022 tax return until October 2023, but they had a valid extension which they could show you. Obviously, they should be able to prove to you that they filed their 2021 return.

If someone is not staying current with their federal tax obligations, that is a warning of possible danger. It could be that they are not tracking their money well enough to be able to do their returns, or they have some other reason why they are not paying their taxes. Whatever the reason, not filing taxes on time may show that they are not managing their money well, which is obviously a significant issue.

Another helpful nugget to look at when considering someone as a potential co-investor or colleague is the attitude of that person toward alcohol. Is their alcohol consumption consistent with your comfort level? I’m not going to go into details about this, but I have been assisting clients with property loans that have gone into default. It was later learned that at the time the makers or borrowers entered into the deal, they were dealing with a substance abuse problem. Fortunately for them, they are now on the road to recovery, but unfortunately, the deal is suffering greatly.

This is not an isolated incident. Rather, it seems to be a pattern I’m seeing repeat itself, and when I see a pattern, I take notice and look for where it is showing up and how I can do a better job both in my own deals and in the deals my clients are doing.

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Until next time,

Jeffery S. Watson