Collector - November 2009

solid foundation is built to support a permanent dwelling. On any particular area, you dig until you are satisfied you have firmness under foot.”

There is no formula to determine how much time and resources should be allocated to due diligence. The answer will depend on the portfolio—whether it’s big or small, the type of assets involved and the resources available.

Varrichio believes there is no such thing as too much due diligence. “There should be as much due diligence as possible performed to appropriately assess the risk and the potential upside,” he said.

Taulbee agreed, adding, “The more you know, the better.”

Freeland warned that buyers should not take the information sellers provide at face value.

“If it were important for you to know about the educational qualifications of top management, for example, it is not enough for any of them to state that they went to college or to answer ‘yes’ to such a question on your due diligence survey or have a diploma on the wall,” she said. “If it is important, you’ll find out what college, the year of graduation and major. Then you’ll call the college to confirm it all.”

Economic Impact

Recent economic changes have created a need for even higher due diligence standards.

Taulbee believes buyers are now using more in-depth scoring and validation models to determine what an asset is worth.

“In the past, asset valuation was not

as sophisticated or comprehensive, but now it is too risky not to undertake a more robust valuation approach,” Taulbee said.

Liquidation models may also have to be reassessed to align with current economic times. According to Varrichio, many of the portfolios being worked today had due diligence performed on them several months and possibly years ago and the past liquidation models were based on historical data gathered in better economic times. As a result, most portfolios are underperforming the due diligence liquidation models.

“If this is not recognized, then due diligence models will continue to overestimate returns and your bids will likely be too high,” Varrichio said.

Performing thorough due diligence is absolutely critical, especially in today’s environment.

“Twelve years ago, when we first started, we knew less about the business and performed less due diligence and were securing more profitable transactions,” Varrichio said. “Today’s market is highly competitive and much more complex.”

Freeland added, “Whatever you do in the area of due diligence when buying or selling debt, consider that the industry as a whole is best served when we all remember that respect and professionalism serve us well. Fairness and integrity can be standards that define us all.” cm

Kim Rath is ACA International’s director of compliance and content development.

The recently updated Due Diligence Guidelines is only one of many products and resources ACA International’s Asset Buyers Division offers asset buyers. They are available to purchase from ACA’s Online Store under the Asset Buyers Section. Visit http://www. acainternational.org/store for details.