The failure did not only impact the festival goers but also the investors, creditors, local workers and economy on the Bahamian island of Great Exuma. The documentary has sparked outrage for the devastating impact the proposed festival has had.
The festival organizer, Billy McFarland, admitted to tendering fake documents inducing investors to put more than $26m into his company. One FYRE festival worker was forced to use $40k of her savings to cater for 1,000 meals per day. Since the documentary, a ‘GoFundMe’ page has been set up raising over $200k.
Being the accountants that we are, we couldn’t help but identify areas where our diligence work would have raised red flags, stopping the venture in its tracks before it spiraled out of control.
FYRE Festival: 10 key red flags
- Unsubstantiated revenue – false representations were made to investors regarding the company’s turnover, with income claimed to be in the millions when it was actually under $100k.
- Bank overdrafts – using overdrafts as longer term funding, which should be used as part of the working capital cycle.
- High cash burn – a company spending money faster than it receives money raises the issue of ‘when will it run out?’
- Large cash payments – any company dealing with cash raises the risk of fraud. It could also link to money laundering, undisclosed payments and understatement of profits.
- Accounting controls – the control environment in the finance team would have been exceptionally weak, with Billy McFarland being the only person having true transparency and control.
- Personal AMEX payments – the management team and other employees were forced to make personal AMEX payments, again highlighting the control weaknesses and lack of cash.
- Lack of adequate insurance policies – a high-level review of the company’s insurance policies would have identified there was no cancellation insurance. This would give a clear indication of management’s appetite for risk.
- Local staff unpaid – reviewing creditors gives a clear indication of a company’s ability to pay them. Not paying staff gives an immediate indication of how frail a business is.
- Spiraling marketing spend – this occurred mainly before the festivals downfall, however high marketing spend to acquire customers can indicate whether a business is viable in the long term.
- Last minute property and lease changes – from the Investment Memorandum the company lied about its property holdings. A review of the property leases and commitments would have identified the dire financial position the festival and company was in.
Had the company been subjected to a Due Diligence process, the above would have been identified. Under normal circumstances any one of these red flags, if not satisfactorily cleared, could result in an abort scenario.
Our team works with investors, banks and businesses undergoing growth who require Due Diligence to be performed for investments, lending, and acquisitions. Due Diligence is about taking a step back to see the bigger picture and providing assurance that the decisions being made are the right ones.
My comments were first published here in Real Business.