DUE DILIGENCE (DD) IS A CRUCIAL STEP TOWARDS:
1) validating whether the buyer should move forward with an acquisition2) narrowing down, from a buyer perspective, the critical terms of the sale agreement3) planning for integration and synergy realization post close
Here are some lessons learned:
1) RUNNING A SUCCESSFUL DD PROCESS IS AS MUCH ABOUT PROCESS AS IT IS ABOUT THE “HARD BUSINESS ISSUES”.
The diligence manager is responsible for– working with 8-15 functional areas– managing the team– reporting findings to the deal steering committee
…. all in a fast-paced process with scarce resources and a ticking timeline.
Without exceptional project management, the process will fall short.
So make sure to identify the right individual(s) to lead this phase and give them the freedom and trust to manage the process as needed.
2) COMMUNICATION IS CRITICAL
The DD manager sits at the intersection of information coming from many different directions.
As an example, resolving intellectual property due diligence findings often requires looping in operations, legal and commercial teams. The DD manager should know when (and how) to share information at the right level with the right individuals.
In situations where I did not have the organizational knowledge or the internal relationships to advance conversations, I’ve found it invaluable to partner with someone else who does.
3) INFORMATION OVERLOAD IS JUST PART OF THE PROCESS, ACKNOWLEDGE AND PROACTIVELY MANAGE IT
Given the number of documents and information in a typical data room, it is physically impossible to focus on everything at once
The corporate development DD manager (or the buy-side advisor) is best served by working with the functional leads to segment these issues into➢ deal killers➢ issues that materially impact value➢ issues that marginally impact value➢ issues that don’t impact value but are relevant for integration
With this framework, the team can better prioritize DD takeaways.
4) ASSIGN ACCOUNTABILITY TO FUNCTIONAL EXPERTS
Leverage the expertise of the functional teams to scale out the process. Ensure that the functional leads responsible for DD
– Understand the deal context and deal rationale– Cultivate a sense of “what rocks to turn over” during the DD process– Review the template diligence list and prioritize the areas of focus– Have a structure to report on findings, mitigation strategies, valuation impact assessment and integration impacts
5) DON’T LOSE SIGHT OF THE “SOFT STUFF”
The pressure of DD is an acid test to assess the target’s culture, the engagement of the target’s management team and the target management’s willingness to be constructive during the negotiation and post-close process.