3 Crucial Due Diligence Questions: Lessons from JPMorgan Chase’s Acquisition of Frank

These questions can expand your due diligence process and help you avoid mistakes like the one made by JPMorgan Chase.

The business landscape is rife with success stories that inspire and cautionary tales that warn. For every highly regarded acquisition, there’s a tale of disaster that private equity firms and other investors should heed.

JPMorgan Chase’s acquisition of Frank, a promising student aid platform, fits into the latter category. Frank’s mission was to streamline the FAFSA process for college students, an objective that initially earned accolades and a coveted spot for founder Charlie Javice on the Forbes 30 Under 30 list in 2019. 

The rapid ascent of Frank caught the attention of JPMorgan Chase, leading to a $175 million acquisition in 2021. But the discovery of fabricated contacts within Frank’s customer relationship management (CRM) system has become a stark reminder of the critical nature of due diligence — due diligence that goes beyond just business financials by diving deep into digital marketing metrics.

We recently published a white paper on Frank and JPMorgan Chase’s $175 million mistake. Javice has pled not guilty to the charges against her, and she says that prosecutors are withholding evidence as the legal case proceeds. No matter the outcome of the trial, mistakes were made during the acquisition process. Here are three essential questions that private equity firms should incorporate into their due diligence processes to avoid such pitfalls.

1. Scrutinizing Marketing Funnel Metrics

Marketing metrics are the pulse of a company’s outreach efforts. During due diligence, it’s vital to examine a company’s cost per mille (CPM), clickthrough rate (CTR), conversion rate (CVR), and the lifetime value (LTV) of customers. These figures should be held against the light of industry standards. If they deviate, is there a justifiable reason? 

Frank’s numbers might have passed initial inspection, but a deeper dive into the company’s metrics against industry benchmarks might have revealed discrepancies early on. 

This highlights the importance of including digital marketing professionals in the due diligence process. If someone who lives and breathes digital marketing had looked at Frank’s digital marketing performance compared to its contact list, he or she would have raised red flags about how that level of performance generated so many contacts.

2. Assessing Market Penetration

Understanding the total available market (TAM) and a company’s share of it can reveal much about its position and potential for growth. With around 20 million students completing FAFSA annually, Frank’s claim of securing 1.4 million customers in 2023 would imply an impressive 7% market capture. 

This level of success is exceptional and should prompt questions about the feasibility of such market penetration given the company’s marketing initiatives and performance metrics. We all want to believe in a success story, but the due diligence process is the perfect time to look with a skeptical eye at the story behind an organization’s growth.

3. Validating the Metrics

Validation is a cornerstone of credibility. Due diligence must include a verification of the data provided, such as emails, phone numbers, and mailing addresses. Are the contacts unique, and if not, why? 

A prudent step is to request a sample test of the audience to substantiate the figures presented. This approach might have uncovered the inconsistencies in Frank’s CRM data, preventing the costly oversight experienced by JPMorgan Chase. In the white paper, we explore how JPMorgan Chase faltered in this area.

Get Support for Your Due Diligence Process

The case of Frank is a compelling study in due diligence — or the lack thereof. It underscores the importance of not only asking questions but also ensuring that the answers hold up to rigorous verification. 

Private equity firms looking to invest in or acquire businesses can learn from JPMorgan Chase’s oversight. By integrating these three due diligence questions into your evaluation process, your firm can better safeguard against the costly consequences of overlooked anomalies in data and overly optimistic market share claims. 

At Aux Insights, we believe that informed scrutiny is the bedrock of investment success. Download our white paper to learn more about where JPMorgan Chase went wrong, and get in touch with us to talk about support for your due diligence process.