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C
OPYRIGHT

2009
-
2012 A
LL

R
IGHTS

R
ESERVED



T
HE

D
UE

D
ILIGENCE

E
QUATION








The Due Diligence Equation


Understanding Due Diligence in the 21
st

Century











Due Diligence Press

C
ONTENTS

I.
What
is Due
Diligence?

II.
Science

III.
Education

IV.
Information

V.
Standards

VI.
Technology

VII.
Publications

VIII.
Certification

The Due Diligence
Equation, 4th Edition

Copyright ©2009
-
2012 Due Diligence Press, The Association of Due Diligence Professionals, Due Diligence, Inc., The Institute of
Due Diligence Engineering,
Due.Com
, Inc., Emergent Acquisition
Value, Inc.
Charles F.
Bacon, and/or Due
Diligence Sciences
LLC.

All rights reserved.

Published by Due Diligence Press

No part of this publication may be reproduced, stored in an information storage and/or retrieval system, or transmitted in an
y f
orm or by any means, including electronic, mechanical,
photocopying, recording, scanning, or otherwise, without the prior written permission of the Publisher.

Limit of Liability/Disclaimer of Warranty: While the publisher has used its best efforts in preparing this publication, the p
ubl
isher makes no representations or warranties with respect to the
accuracy or completeness of the contents of this publication and specifically disclaims any implied warranties of merchantabi
lit
y or fitness for a particular purpose. No warranty may be created or
extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable
for

every situation. Readers should consult with a professional where
appropriate. The publisher shall not be liable for any loss of profit, or any results of the application of this publication
in
any situation, or any other commercial damages, including but not
limited to special, incidental, consequential, or other damages.

Notice: No responsibility is assumed by the publisher for any injury and/or damage to persons or property as a matter of prod
uct
s liability, negligence or otherwise, or from any use or operation
of any methods, products, instructions or ideas contained in the material herein.

Proprietary elements of this publication are the subject of various intellectual property rights. Due Diligence Press is not
res
ponsible for identifying any or all such intellectual property rights.

Various trademarks, copyrights, service marks and other intellectual property contained within are used with permission by, a
nd
are the property of the intellectual property owners.

Publisher, Due Diligence Press, 1153 Bergen Parkway
Ste

M271, Evergreen Colorado 80439 USA www.duediligencepress.com.

Published in the United States of America

10 9 8 7 6 5 4 3 2 1

The Due Diligence Equation: What
is Due Diligence?

At its core
, “Due Diligence”
is simply common sense.

From earliest times
,
everyone considering decisions did so with diligence
to
arrive at the best
answers.

In the
mid
-
20th century
,
the term became very confusing, used very loosely
in many different fields in very different ways, often contradictory, often
disparate, and often negative.

In
the
late
-
20
th

century
,
a new form of due diligence
was developed based
on modern scientific methods and standards and diligence , the simplest
and
best
definition:
common
sense, perfecting the process
of one of
humankind’s most obvious fundamental
functions, making decisions.

Before
making
decisions,
follow
the
careful process
of due diligence to
make
sure you know everything possible,
so that you
make the most informed
decisions, business
, education,
government and personal.


In the 21
st

Century, Due Diligence is Informed Decision Making
.

The Due Diligence Equation: What
is Due Diligence?

Accounting

Acquisitions

Boards of Directors

Branding

Buy
-
Sell Agreements

Compensation

Competitive Intelligence

Conflicts of Interest

Corporate Planning

Cross Border Issues

Culture

Development

Enterprise Relationships

Environmental

Equity & Debt Financing

ESOPs & ISOPs

Exit Planning

Fairness Opinions

Finance

Human Capital

Import/Export

Information Systems

Infrastructure

Intellectual Capital

International

Investment

Investigation

Governance

Legal

Licensing

Liquidation

Management

Marketing

Mergers

Operations

Organizational Structure

Performance

Planning

Private Offerings

Products

Public Offerings

Quality

Real Estate

Research

Safety

Sales of Businesses

Security

Services

Shareholder Issues

Social

Strategic & Tactical Planning

Technology

Valuations

Vendors

A Few of the Many Areas of Due Diligence

Due Diligence Education
brings
the qualities of traditional due diligence together with the vibrant,
contemporary new
Modern Due Diligence.


Due Diligence Education
initiatives:


F
oster
innovations in due diligence education and training


A
dvance
the field and discipline of due
diligence

¾
E
nable
due diligence education at
the
global and local
scales


Due Diligence Education
includes:


Certification Courses/Examinations for Professional Credentials


Accredited Degree Programs are being developed for Bachelor, Master and PhD


Books & Textbooks


Guides, Toolkits, Forms

& Handbooks


Mentoring & Coaching


Seminars


The Due Diligence Equation: Education

Due Diligence Information
includes:



Daily Due Diligence Newspaper
& Due
Diligence News
Feeds



the latest due diligence news from around
the world



Due Diligence Inquiry Service



for people that need help
with a
decision or that need help with a due
diligence project


Annual Worldwide Guide to Due Diligence
includes:


Due
Diligence
Services

: guide to due diligence services firms worldwide


Due Diligence
Resources

: guide to due diligence
resources worldwide


Due Diligence
Books and Book Reviews

: guide to due diligence
books worldwide


Due Diligence
Events

: guide to due diligence
events worldwide


Due Diligence
Publications
:


Due
Diligence
Education
: designed
to help practitioners and businesses understand the disciplines of due
diligence
and
how to manage and implement the
myriad due diligence events and processes that take
place throughout all
organizations

The Due Diligence Equation:
Information

Due Diligence Standards

are guidelines
for decision
-
making and due diligence systems, processes and best
-
practices for both large and small enterprises.
By incorporating
due diligence standards into
decision
-
making
and due diligence,
organizations benefit
through improved performance, more reliable results, and increased
profitability
.


Standards
are a critical part of any successful
organization, and


produce
higher economic growth than patents and
licenses


benefit
organizations significantly at both the short and long term strategic
level


increase
competitive positions


increase agility


increase
innovation


increase profitability


Standards are around us
everywhere.
Examples include:


the
number
system


weights
and
measurements


the
monetary
system


cellular phones


nuts
&
bolts


telephones


language


world trade


Due Diligence Standards

are tools to continually improve the quality, consistency, effectiveness and efficiency of
due diligence services and
programs, and are
precise,
optimum, practical and
impartial
policies
and procedures
emphasizing core principles rather than checklists and facts
.

The Due Diligence Equation:
Standards

Due.Com
builds new technologies, licenses those
technologies to
different
markets,
and provides
ongoing
support to
each
licensee.


The proprietary science
driving the analytic engine at the heart of the Due.Com processing system is
Emergent
Intelligence
,
the next iteration of artificial intelligence.
Twenty seven years
of research, development, and
inspirations form the basis of Emergent
Intelligence. In
general,
technologies built
using the Emergent
Intelligence
system identify, summarize and assess the critical areas of a business, subsidiary, division,
department, project, technology, idea, product or
service, then taking
users through
reviews
, analyses and
recommendations, and then identifying areas
of difficulty and
areas that
need
attention.


Formed in 1999
-
2000
,
Due.Com has
developed
a number of
concepts,
services

and
products,
some of which
have been licensed
, and
others which
are
the foundations
of additional
licensable
technologies.


Specific tools can focus on various stages and functions in the evolution of
organizations:


Next
Generation Due
Diligence
tools
provide advanced due diligence in a web product delivery business
model through a license to Due Diligence, Inc.


Internet
and
Intranet tool systems
provide a
variety of tracking and analysis
functions


Web
-
Based tool systems
reduce
the time, costs and uncertainties associated with various analysis
functions


Rating and Scoring tools

rate organizations
, parts of organizations, financial instruments, or
countries


PC
-
based
tools
support
advanced due diligence
software products


Other Emergent Intelligence tools
process
various forms of data, and
produce
various forms of output,
such as in industrial controller applications and hard
-
wired
products


All Emergent Intelligence
tools
assist
users
by first determining all elements necessary to understand a topic and
second, which
elements are critical for the success of
any topic, short or
long
term



The Due Diligence Equation:
Technology

Due Diligence, Inc.
founded in 1984, is the oldest
firm dedicated solely to due
diligence.


Due
Diligence Inc.
redefines
what due diligence is, who it’s for, and what it’s for
. It’s for every decision that
is
made,
every day.
With it’s branded slogan,
Modern Due Diligence
is more than traditional due
diligence
, Due
Diligence, Inc. shows that
informed
decision making
is applicable
to more than just mergers and acquisitions;
and
is affordable
for any size business.


Due Diligence, Inc. uniquely benefits clients
on projects and
transactions


from
start
-
up to $10+ billion in
value


from
the simplest to the most
complex


from
early
-
stage to the largest
multinationals


for
more than 600
clients


In more
than 6,000
projects


Due Diligence, Inc.
's team:


senior
core leadership team of highly skilled
individuals,
with broad backgrounds in advising and
operating profitable business
ventures


a
diverse and deeply experienced global network in 38
countries


Business
Partnerships &
Alliances


an extensive
Advisory Board of more than 60
experts


a
broad network of several hundred contract
firms


augmented
with networks of critical
relationships


"You don't have to do diligence on every part of your organization, just those you would like to succeed
.“

The Due Diligence Equation:
Services

The Association of Due Diligence Professionals
is the first professional association dedicated exclusively to the
due diligence industry.


The Association has unparalleled initiatives fostering innovations in due diligence:
education, training, standards
and professional certification. With a history dating back to 1984, The Association brings the qualities of
traditional due diligence together with the vibrant, contemporary new Modern Due Diligence.


The mission
of The Association of Due Diligence Professionals is to advance the field and discipline of due
diligence, and the practices of professionals dedicated to due diligence success, through education, standards,
certification, research and support, with infrastructure to support and enable due diligence at both the global
and local scale.


The Association provides
education and training
through courses, seminars, textbooks, mentoring, coaching,
forms, guides, toolkits and handbooks
.

The Due Diligence Equation:
Training

The Institute of Due Diligence
Engineering
is
focused
on the theoretical core of due diligence thinking and
developing increasingly mature scientific methods for due diligence systems.


Projects of
the Institute include:


developing a repository library of collection of scholarly journals, books, conference proceedings, etc. of
all due diligence materials


constructing and enhancing the Institute’s website


obtaining a dedicated campus for its activities


fundraising to realize the goals and objectives of the institute


due diligence education


research in due diligence science


establishing an academic press to publish a regularly published journal, a regularly published newsletter
and books to serve the scientific community


designing residential and web educational courses and software in due diligence disciplines, such as
principles of due diligence thinking, due diligence systems simulation, to educate new generations of due
diligence thinkers


establishing degree programs in due diligence sciences and technology


The concepts
and theoretical results of due diligence thinking have many real
-
world
benefits
. Therefore the
overall mission of the Institute is to apply
theoretical studies to develop systems so that future generations will
think diligently and make decisions due diligently


The Association of Due Diligence Professionals
also plans various programs and projects to assist the Institute.

The Due Diligence Equation:
Research

Modern Due Diligence is a
suite of
science
-
based tools
applying rigorous
, disciplined due diligence process to an
infinitely wide array of
organization needs
and events. These are the first low cost


high quality due diligence
tools. The advanced
artificial intelligence technology called
Modern Due Diligence cost $3+
million in scientific
research and development,
analyzing 6,000+ real
-
world projects performed
for
600+
clients over 27
years.
Modern Due Diligence
technology
-
enabled analytical and reporting
tools
deliver customized confidential due
diligence reports unique to
each specific
organization.
The scientific
due diligence
system goes “beyond the
numbers” with fully comprehensive understanding
of implications and insights of
decisions
.
Scores are produced
on every
aspect of
organizations, but do not use the
old fashioned simple
“good or bad”
or “
-
5 to +5”
systems, but
utilize objective
, mathematically
-
determined ratings based on a proven non
-
biased methodology
of the best computer
-
generated algorithms with multivariate analysis of 150+ distinctive elements and metrics.
The sophisticated science ensures
that all possible factors are considered to
provide decision makers greater
agility, to implement
decisions
faster, with more confidence, to extend
competitive
advantage,
with
much
better knowledge,
while
being unbiased
, and with
greater
quality and lower costs than
traditional analysis
.


Emergent Acquisition Value
is the first
rigorous, systematic and standards
-
based
suite of Mergers
& Acquisitions
(M&A)
decision making and M&A decision support
services
tools backed by certified expert
participation. An
advanced artificial
intelligence technology
system, Emergent Acquisition Value is designed
to reduce the time,
costs and uncertainties associated with critical
M&A activities, and is
a new level of M&A services delivery
infrastructure
combination of digital/analog hardware and unique analytical software to support the M&A
services industry
worldwide, with:


The
first reliable, consistent, analysis and M&A decision
-
making support
system


The
first best practices and standards for M&A support
products


The
first M&A ratings system capable of rating all M&A factors in an organization


The
first comprehensive suite of intelligent M&A analysis and M&A support
products


The
first broadly affordable pricing structure and rapid turnaround system for M&A support analysis and
M&A decision
making

The Due Diligence Equation:
Products

The invention of Due Diligence as a separate discipline
is a relatively new innovation. The provocative
developments of new concepts and tools using Due Diligence require an expansive variety of publications.


Due Diligence Press
publishes
business, general, and academic works on the subjects of due diligence, fraud
prevention and due diligence theory. Current and planned publications include books, articles, journals,
magazines, collection volumes, monographs, proceedings of conferences, seminars and workshops, speeches,
papers, and special electronic publications.


The
charter for Due Diligence Press
includes the publication of business, general, and academic works on the
subject of due diligence, fraud prevention and due diligence theory. The organization’s current and planned
publications include books, articles, journals, magazines, collection volumes, monographs, proceedings of
conferences, seminars and workshops, speeches, papers, and special electronic publications.


Due Diligence Press addresses a wide audience in the world
: executives, scientists, managers, regulators, board
members, educators, shareholders, researchers, founders, bankers, lawyers, suppliers, accountants, investors,
consultants, customers, vendors and entrepreneurs
.


The Due Diligence Equation:
Publications

The due diligence profession is challenging, changing, and competitive
. In traditional due diligence, now dating
back to the middle of the last century, decision makers and specialists responded to a wide variety of complex
issues by applying their own knowledge and skills. This resulted in a rather mediocre overall track record and
decidedly lackluster success, most strikingly evidenced in the M&A sector where two
-
thirds of all acquisitions
since 1960 failed completely, or failed to deliver as expected. In the modern world, the profession is also
modernizing, finally becoming a formal professional discipline, and practitioners are also changing with the
times, using the discipline of due diligence in practical application of their skills to become more valuable to
their organization or to their clients.


The Certified Due
Diligence
Professional Credentials Programs
are issued
by the Association of Due Diligence
Professionals (ADDP), the non
-
profit membership association serving the due diligence industry.


Certification as a
Certified Due Diligence Professional

or
Certified Due Diligence
Specialist is
granted
by:


Successfully
satisfying minimum standards of relevant experience and training,


Successfully
completing a rigorous examination to demonstrate due diligence knowledge, performance,
proficiency and comprehension, and


Committing
to high standards of due diligence ethics and practices.


Certification helps practitioners with professional
and personal benefits
:


Increase reputation

personal
brand


Increase respect
,
esteem
and
credibility
, with management,
colleagues
, and
peers


Increase salary
or consultancy rates


Be at
the leading edge of the due diligence discipline


Benefit careers,
with potentially higher positions


Be
recognized for
advanced
professional capabilities,
new
knowledge,
new
expertise


Professional Due Diligence Certification
also provides
protection
for
employers
and
clients
from
untrained
individuals
.

The Due Diligence Equation:
Certification

Growing
out of the field
of
Artificial Intelligence
,
Emergent
Intelligence

is an important new science based on
the discovery of a set of principles that unifies complex systems. Artificial Intelligence is a branch of Science that
deals with helping machines find solutions to complex problems in a more human
-
like
fashion, borrowing
characteristics from human
intelligence
and applying them as algorithms in a computer friendly
way, including:


Expert
Systems



also known as
Business Rules
, computer programs capable of solving problems using a
knowledge base generally crafted by human
experts


Neural
Networks



networks modeled on the human brain and the internal structure of the network is
composed of a small number of artificial
neurons


Genetic
Algorithms and Evolutionary Programming



mimicking the process of evolution (the survival of
the
fittest)
The best solutions are mated together to create better offspring solutions.


Decision
Trees



structures that allow learning of opinions (e.g. good or bad) about objects based on their
attributes


Data
Mining



the process of extracting useful rules from very large sets of
data


Bayesian
Networks



networks that model the relationship between
variables


Natural
Language Processing



the task of extracting meaning from text (sometimes known as
Computational Linguistics
)


Pattern
Recognition



involves determining the characteristics in specific samples and sorting them into
classes


Content
Analysis



extracting key words & other patterns from large volumes of text


Artificial
Life



involves modeling and mimicking living
systems


Simulated
Annealing



A technique which can be applied to any minimization or learning process based
on successive update steps (either random or deterministic) where the update step length is proportional
to an arbitrarily set
parameter


Fuzzy
Logic



emulates approximate, quantitative reasoning that is concerned with the linguistic ambiguity
that exists in natural or synthetic
language

The Due Diligence Equation:
Science

There are obvious and well
-
documented limitations to each of these approaches. Emergent Intelligence includes
new discoveries beyond these approaches, and incorporates them with several advances on the cutting edge of
science including:


Complex
Adaptive Systems



complex, nonlinear, interactive systems that have the ability to adapt to a
changing
environment


Chaos
Theory



the attempt to uncover the regularity hidden in processes that otherwise appear
random


Catastrophe
Theory



a branch of mathematical topology that is concerned with the way in which
nonlinear interactions within systems can produce sudden and dramatic
effects


Combining these concepts and techniques with new science, Emergent Intelligence is a unique and extremely
powerful new discipline. In
the simplest terms,
Emergent Intelligence is the science of understanding all the
elements and interactions of
systems
. The
science precisely defines all the characteristics of each discrete element
of a system, how each element may interact with any of the other elements, and how important each element
and each interaction are to all the other elements and interactions, and to the system within which they reside.
Emergent Intelligence uncovers patterns, interactions and characteristics that do not occur or are not obvious at
the discrete element level, but emerge as all the elements, interactions, and the entire system are collectively
classified, analyzed and evaluated.


Emergent Intelligence is a way of thinking, a way of looking… seeing systems as organisms
. For instance,
looking at a business as an organism through the eyes of Emergent Intelligence, a business enterprise is a living
being, with all the elements of life, intelligence and self
-
awareness… expending energy, ensuring survival,
growing from youth to maturity, learning how to improve… living as a citizen of the world.


Applying Emergent Intelligence to making
decisions
can be done using tools
that enable
decision makers to
make the best possible decisions. Every aspect of decisions that should be considered,
is
considered. With each
aspect rated (scored) in relation to a standardized and universal
organization model
, along with observations
and recommendations, the decision maker can understand all possible variations and impacts of decisions.


The Due Diligence Equation:
Science

Applying
Emergent Intelligence to
Decision Making


The
traditional process
of assessing key factors relevant to
decision making is
complex and fraught with
inconsistencies and assumptions, and
contain
the bias of the decision makers. Evaluations are historically
performed without a norm, standard or
general systems model
, and without the benefit of scientific formula or
method.


In the current
arena
, an accurate understanding of existing, historical and potential industry patterns and
conditions is
critically
-
required
.
These factors, combined with general systems
models
and
up
-
to
-
date standards
for
all parameters
are the basis of an effective analysis. Current
decision making processes
fall short of full
utilization of these factors. An additional problem with conventional
decision making processes
lies with the
scope of the information considered and the imprecise and inconsistent manner in which
analyses
are
performed. Further
weaknesses of conventional
processes
include high costs, lengthy implementation times and
high failure rates. These processes

are also limited in that they extract data without providing analysis, and
organize data without making recommendations.


The Emergent Intelligence process can be divided into
four major
activities
:

1)
information
and factual input;

2)
execution
and processing information to obtain useful interim or final results or condition status of the
issue or concern under investigation in specified areas;

3)
comparison
of the results or condition status to standardized values of the general relevant
environment
or
activity, as well as comparisons to general
systems
models, to gain an objective view and bench
marking of
an organization
or concern; and

4)
analysis
and generation of results including ratings useable by interested parties, reports or
recommendations so as to quickly focus on the key issues and relationships with related topics or views.
The historical condition of the same concern can also be used to illustrate changes in the
organization
over
time.


The Due Diligence Equation:
Science

The
specific
embodiments of Emergent Intelligence may comprise various methods for evaluating
information:

1.
adaptive
generation of tools
containing selected information in a chosen subject area;

2.
the
tools
including adaptive metrics
from multiple sources in the subject area;

3.
adaptive
prompting users
of the tools for user information relating to the chosen subject area;

4.
adaptive user
information
addition to
the tools;

5.
adaptive comparison of the
user information with the metrics to produce
ratings (scores);
and

6.
adaptive generation of reports
derived from the
ratings.


These embodiments offer advantages over traditional human
-

and technology
-
based decision systems
:


Flexible,
scalable, highly customizable


Standards
-
based
, with a set of minimum requirements for effective decisions


Consistent
, repeatable results


Can
be confidently delegated


Objective
analysis and outputs


Applicable
to all types of decisions


Fast
, thorough and easy to use


Rapid
results turnaround


Reduces
risk, increases confidence


Affordable
and
cost
-
effective


Emergent
Intelligence overcomes the disadvantages and limitations of prior approaches

by providing a system
and method for
adaptive fact classification (adaptive taxonomy) such
that relevant facts can be used in multiple
implementations, coupled with
adaptive quantification
, assessment, analysis,
and rating of
all the decision
options. Decision topics such as, but not limited to, debt or equity financings, strategic planning, risk
assessments, mergers, acquisitions, audits of the processes of
business organizations, human
resources, regulated
activities,
and intellectual property all benefit
from the use and application of Emergent Intelligence.


The Due Diligence Equation:
Science