After being burned by an acquisition where key customer programs were ending, Milliken now requires a "customer awareness study" for every deal. This involves third-party interviews to validate the target's brand strength, market perception, and any hidden customer-related risks before closing.

To combat fraud, some credit funds use the prospective borrower's due diligence deposit to fund deep background checks on founders and management as the very first step. Any past financial impropriety, no matter how old, results in an immediate rejection, making recent high-profile frauds avoidable.

Despite extensive online and third-party checks, Jacobs considers multi-day, in-person interviews with the target's senior management to be the most crucial part of due diligence. This direct interaction is essential for uncovering hidden risks, opportunities, and the intangible "skeletons" that don't appear in financial statements.

During diligence, an investable founder is transparent about current risks (e.g., a major customer account is in jeopardy) and presents a mitigation plan. This candor is more valuable and trust-building to an investor than a founder who projects a flawless, risk-free business.

Centana Growth uses its deep diligence process to uncover operational insights for founders. In one case, they collaboratively identified a flaw in a company's core matching algorithm during a diligence session, leading to immediate improvements before the deal even closed. This reframes diligence as a value-add activity.

Salas O'Brien provides every target with a contact list of all previously acquired leaders. If a target fails to perform this reverse diligence by calling these references, it's seen as a major red flag, suggesting their stated commitment to their team's future may not be genuine.

The most effective due diligence involves finding franchisees not on the franchisor's reference list and asking them one key question: 'Knowing everything you know now, would you do this again?' Their unfiltered answer provides a clear signal about the business's true challenges, profitability, and franchisor support.

A simple but highly effective due diligence check for emerging market companies is to verify if their auditor has changed in the past 10 years. An auditor change often signals that something was amiss with the previous accounting, providing a crucial warning sign for investors to investigate further.

When sourcing a carve-out proactively, the seller may not be fully committed. State Street recommends the seller commission a sell-side Quality of Earnings (QofE) report. Their willingness to invest in this serves as a strong signal of their seriousness and provides a more accurate financial baseline, reducing the risk of surprises during diligence.