2014|Case No.E523| Length 29 pgs.
The Eyewitness Surveillance case tells the story of Rush Arnold and RT McCloy, friends who met while studying at Wharton, who raise a search fund under the name Channelstone Partners. In the fall of 2010, after having spent two-thirds of their search fund capital and reviewed over 200 companies, they came across Eyewitness Surveillance, a company specializing in the use of video technology to protect the assets of car dealerships. Eyewitness’ cofounder, Vince Redland, was interested in selling the company to pursue other interests and Arnold and McCloy found the industry, company, and deal all compelling. Over the course of the next two months, they engaged in a due diligence process which further validated their interest in the company, but also raised several red flags. Among the issues highlighted in due diligence included widespread employee disgruntlement, particularly with Vince (who was also the top sales person), a reluctance to share detailed financial information, and an 11th hour disagreement about a contract clause stipulating that the purchase price would go down if monthly revenues declined after the close. Despite having conducted a thorough and in-depth due diligence process, Arnold and McCloy were at the end of their search capital and facing a deal that was on the brink. They were now faced with the question of whether or not they wanted to charge ahead, despite the red flags, or walk away, knowing that this could potentially be the end of the road.
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The learning objectives of the case are to put students in the position of Arnold and McCloy, presenting them with the difficult decisions these two would-be entrepreneurs have to make around a challenging deal. How hard can and should they push back on the seller to make sure they get the information they want, without pushing him away? How should they respond to certain requests or outbursts from the seller and/or his broker that could be viewed as potentially unethical or inappropriate? As well, students are presented with real-life examples of a due diligence list and indication of interest letter and asked to present their thoughts about the strengths and weaknesses of each.