WTF (What the Fish): What SMEs Can Learn from the KWAP E-Fishery Scandal About Due Diligence
When Kumpulan Wang Persaraan (KWAP), Malaysia’s massive civil service pension fund, invested RM200 million into E-Fishery, an Indonesian aquaculture technology startup, it was hailed as a forward-thinking move into the agri-tech space. Today, it stands as one of the most cautionary tales in recent corporate history, with the startup’s founder facing criminal charges over alleged misappropriation of funds and the investment largely written off.
While an SME owner might look at a RM200 million deal and think, “That’s an institutional problem, not mine,” the underlying failure is universal. The core lesson from the E-Fishery scandal isn’t just about the size of the check; it’s about the danger of falling in love with a “sexy” pitch deck while failing to verify the physical, financial, and legal reality on the ground.
For Small and Medium Enterprise (SME) owners looking to acquire or invest in another business, the stakes are just as high. Here is what you need to know about due diligence, why you cannot skip it, and how to right-size it for your budget.
What is Due Diligence?
In plain terms, due diligence (DD) is the process of “looking under the hood” before you buy the car. It is a comprehensive, systematic investigation of a target company’s business, financials, legal standing, and operations conducted before a transaction is finalized.
For an SME buying another business, DD typically covers three main pillars:
- Financial: Verifying that the profits are real, the debts are fully disclosed, and the cash flow projections are grounded in reality.
- Legal: Checking for hidden lawsuits, unpaid taxes, invalid contracts, or intellectual property disputes.
- Operational: Assessing the market position, the quality of the physical assets, the supply chain, and the actual capabilities of the management team.
Why is Due Diligence Important?
Due diligence shifts you from making an emotional decision to making an evidenced-based decision. It is important because it:
- Validates the Asking Price: It ensures you aren’t overpaying for a business based on inflated revenues or exaggerated future projections.
- Uncovers Hidden Skeletons: It brings buried liabilities (like pending tax audits or unrecorded employee claims) into the light before they become your problem.
- Provides Renegotiation Leverage: If DD reveals issues, you can lower your offer, demand the seller fix the issue prior to closing, or walk away entirely.
- Ensures Strategic Fit: It helps you understand if the target company’s culture, systems, and operations can actually be integrated with your existing business.
The Risks of Skipping Due Diligence
Skipping DD is the corporate equivalent of buying a house without an inspection. The risks are catastrophic:
- Inheriting Toxic Liabilities: You might buy a company only to discover it is being sued for millions, or that its core technology infringes on a competitor’s patent.
- The “Mirage” Effect: This is the exact trap seen in the E-Fishery case. You pay a premium for a highly valued digital platform or brand, only to realize the underlying physical assets (the actual fish farms, in this case) are non-existent, unprofitable, or poorly managed.
- Cultural and Operational Clashes: Without operational DD, you might acquire a business whose key staff immediately resign, or whose IT systems are completely incompatible with yours, destroying the value of the acquisition.
The Big Myth: “Our Deal is Too Small for Due Diligence”
Many SME owners justify skipping DD by thinking, “It’s only a RM2 million deal, I don’t have the time or money for a massive audit.”
This is a fatal misconception. The risks of a RM2 million deal are almost exactly the same as a multi-million dollar institutional deal; the only difference is the survivor.
If a multi-billion dollar pension fund loses RM200 million, it hurts their annual returns and causes a PR crisis. If an SME loses RM2 million, the business goes bankrupt. The founder loses their livelihood, their employees lose their jobs, and their personal guarantees might trigger personal bankruptcy. The absolute risk to the entity is 100% in both scenarios. You cannot afford to skip DD just because the deal is smaller; in fact, because your margin for error is zero, you need to be more rigorous.
Right-Sizing Due Diligence: It Doesn’t Have to Be Exhaustive
Here is the good news for SMEs: due diligence is not a one-size-fits-all, multi-million-dollar exercise. While the principles of DD remain the same, the scale can and should be adjusted to suit your costs, the size of the deal, and the nature of the transaction.
Not all DD needs to be comprehensive. You can scale it across three levels:
Level 1: Desktop & “Red Flag” DD (Low Cost / Early Stage)
Before spending money on lawyers and accountants, do this yourself.
- Action: Review the target’s basic financial statements, check for lawsuits online, Companies Commission of Malaysia (CCM) company search, CTOS search, read customer reviews and even a simple google search.
- Goal: To spot obvious deal-breakers. If the founder has a history of bankruptcies or the company has multiple unresolved lawsuits, walk away before you spend a dime on professional fees.
Level 2: Focused / Targeted DD (Medium Cost / Mid-Stage)
If Level 1 looks clean, bring in professionals, but restrict their scope to the highest-risk areas of this specific deal.
- Action: If you are buying a manufacturing SME, spend your budget on an engineer to inspect the machinery and an accountant to verify inventory levels. If you are buying a software company, spend it on an IT expert to check the code quality and a lawyer to verify IP ownership.
- Goal: To deeply investigate the specific areas that drive the value of the business, rather than auditing every single receipt.
Level 3: Comprehensive DD (High Cost / Final Stage)
This is the full-scale institutional approach, reserved for large, complex, or highly risky transactions.
- Action: Full financial audits, deep legal reviews of every contract, extensive HR and environmental checks, and comprehensive commercial market studies.
- Goal: Total risk mitigation for a deal where the financial exposure justifies the high professional fees.
How to Manage DD Costs as an SME
To keep DD affordable, SME owners should:
- Use Fractional Experts: You don’t need to hire a “Big Four” accounting firm. Hire a reputable mid-tier or boutique accounting and legal firm that specializes in SME transactions.
- Phase the Deal: Structure the transaction in phases. Sign a conditional agreement where you have 30 days to conduct Level 1 and 2 DD. If you find major issues, you can exit with only having paid for the initial, cheaper checks.
- Use Seller Financing or Earn-outs: If you can’t afford a massive DD to verify future projections, structure the deal so the seller only gets the full purchase price if the business actually performs as claimed over the next two years. This shifts the risk back to the seller.
The Final Lesson
The KWAP E-Fishery scandal reminds us that charisma, flashy pitch decks, and industry hype cannot replace cold, hard verification. Whether you are a pension fund managing billions or an SME owner looking to acquire a local competitor, the golden rule remains the same: Trust, but verify.
Don’t let the excitement of closing a deal blind you to the facts. Right-size your due diligence to fit your budget, but never skip it entirely. In the world of business acquisitions, a little bit of skepticism today is the cheapest insurance you will ever buy.
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