Due diligence is where a potential buyer assesses the merits of an acquisition. Financial due diligence usually focuses on assessing the quality of earnings, quality of the business assets, potential undisclosed liabilities, and matters that might increase the investment risk.
In today’s M&A, most due diligence is done through digital portals that allow the seller and buyer to interact in a confidential, secure manner. The use of a digital portal provides numerous advantages. However, I wonder if the ease of information creates a drive for more data. While the uploading and capture of the content is easier, the demand on both the seller and buyer increases.
As with many things, due diligence follows the law of diminishing marginal return. Each additional level of comfort you reach in an investment requires exponentially more effort.
Gregory D. Cessna is one of more than 40 host committee members who has helped shape the upcoming Smart Business Dealmakers Conference (formerly ASPIRE), presented by Metz Lewis Brodman Must O'Keefe. He will also be a speaker at the March 5 event.
It is impossible to define how much is too much. Every private equity firm has a process for due diligence, which varies firm to firm by wide margins. To an extent, the size and complexity of the transaction weighs on the process; however, in most deals, the simplicity of exchanging digital information carries the risk of requesting more documentation than necessary to confirm understanding.
As you consider how much due diligence is enough, remember that:
- Your first objective should be check and verify that what you’re told about the business is, in fact, confirmed by due diligence. Once you’re satisfied, no additional due diligence is needed.
- Due diligence takes a toll on the sellers. Often, the process of due diligence drags on the business, slowing performance or impacting the future performance. Additional demands on the seller that have marginal benefit to the due diligence process can impact performance.
- Successful due diligence is less about the amount of effort and more about the quality of the investigation and process. By nature, we believe our chance of success increases with more effort. However, in due diligence, the key is to satisfy yourself that what you believe is true. Once satisfied, more effort to confirm what you already believe has no ROI, nor does it increase the probability of success.
- Due diligence tends to look back in time, and success is often dependent on looking forward. In the process of checking and verifying, consider the future. In this new digital world, the availability of information encourages us to look back and analyze, even though the past isn’t always a promise of the future. Your plan post acquisition has more to do with future success than the history of the business.
Due diligence is vital to ensure the transaction is fairly valued and both parties are satisfied, but the ease of information flow can drive unnecessary due diligence without enhancing the chance of success. The key is to do enough work to satisfy yourself — and no more. Once satisfied on a matter, move forward to complete the remaining due diligence.
Most important, don’t ignore due diligence that looks forward, particularly if you plan significant changes in the company leadership or strategy.
Gregory D. Cessna is the CEO of Consumer Fresh Produce, an innovative distributor of fresh, high-quality produce, Consumer Fresh Produce is a leader in produce supply chain management. Greg has led publicly traded and privately held companies for 30 years, including successfully completing 15 strategic acquisitions and mergers. In 2005, he founded Northbound Consulting to coach and mentor family business leaders in succession planning, strategy and business analytics.
