A View from the Trenches - The Two Most Important Words in Due Diligence

 

The Two Most Important Words in Due Diligence: “So what?”
By Jack Prouty, President of the M&A Leadership Council

Too often, the focus in due diligence is on collecting data rather than analyzing the business. It is equally important to evaluate how well the businesses align; the value the acquisition bring to the acquirer and vice-versa; how the business is organized and how well it operates; analysis of their financials; potential synergies; and an assessment of their culture. At The Art of Due Diligence training events, I challenge the attendees to always ask the “so what?” questions regarding any information collected or interview held:

  • What is the finding and how important is it to our diligence effort?
  • Based upon their business model versus ours, how well do they align with us?
  • What are the integration implications based upon what we have found or heard?
  • Have you found any potential opportunities, “hidden jewels” and synergies; and are these high, medium or low?
  • What are the potential risks in acquiring this business (e.g., financial, operating, culturally, cyber security, etc.) and are they high, medium or low?

In our training programs, I ask how many collect organization charts as part of the information data gathering. Every hand is raised. I then ask how many actually analyze these organization charts for what it can tell them about how the companies are organized (for example, by geography or product line); the business functions they have (which may be more or less than theirs or co-mingled in a different way); job titles (how roles are defined or if they are inflated, which will create a major problem during integration); and staffing levels (how many employees are performing similar job functions). Few hands go up to this inquiry.

I recommend that you focus on the most important things and then press the team with the “so what” question. For example, if you are acquiring a company for their game changing technology, the focus should be on these questions:

  • Is this truly unique, game-changing technology?
  • Do they own the technology, patents, licenses, etc.?
  • What is the market-pull for this technology?
  • Are we positioned to effectively leverage this technology? In other words, are we able to change and adapt our organization, our culture, our rewards/measurements, etc., to create value with this new technology?

Anything beyond these 4 questions is probably of second-tier focus, but these require deep analysis and constant probing with the question, “so what?”

The attendees of The Art of M&A Due Diligence often cite the “so what?” discussion to a top take-away. I encourage you as the diligence project manager to add this simple approach to your process and to ask in response to every report out by the various work stream leads—what is the finding and “so what?” Remember, due diligence is not how much data you can collect, but how effective your effort is in assessing the business fit, value, and risk of the potential acquisition.