Dud Diligence and Integration (Part 1)

This posting is for the C-level executives out there who are doing (or thinking of doing) deals for their small or medium-sized businesses. It is about helping you prevent form from overshadowing substance. It is about details. PS: if details bore you, The Merger Verger humbly recommends your stepping down from the deal business ASAP.

The Merger Verger has seen just a ton of due diligence checklists over the years and found almost all of them wanting … including some that were just pathetic.

Milk Duds! Yippee!Why? Because they are not written by people who run businesses; they are written by people who advise businesses: lawyers and accountants.

Let’s be honest here: due diligence checklists are about the details, where God (or the devil) is. A lawyer can make a fine checklist for matters relating to corporate formation or past board meetings. An accountant likewise within his or her purview.

These lists are fine (essential, in fact) for ensuring that you get what you pay for. But when it comes to understanding whether a product is approaching an inflection in its growth curve or the production manager knows the difference between a kaizan event and a tsunami, they ain’t worth squat.

I was once witness to a classic example of what we could refer to as “Dud Diligence.” Dud diligence occurs when completed checklists become the end rather than the means. The point is not to merely have the information; it is to use it, to understand it so that you make better decisions about your deal and how to make it succeed. In this instance, it was a company’s first overseas acquisition. They had new advisors and placed their own feet on the street only sparingly. The result? Boxes and boxes of information that “hid” massive problems in accounts payable, which, when discovered Hoovered major value out of the deal. I say “hid” because the information was there but a layer or two deep; if anyone bothered to explore the documents the evidence would have been found. But a focus on gathering information rather than on using information left key stones unturned and key problems hidden.

Query: Do your due diligence checklists have places to assign the review and analysis of the information gathered or just a box to tick off when the document has been added to the file? Does your integration process begin early enough for this analysis to be used to recast value or at least get a head-start on integration?

Query: When a target is forthcoming with the majority of your requests and slow with one or two things, do you pay particular attention to those last ones when they do finally come in? Or do you let the pressure of an impending closing lead you to assume that they’re fine. Don’t kid yourself, that delay could be for a reason. Find out.

Cliffhanger: Tune in next time for The Merger Verger’s takeaways on all of this….

1 thought on “Dud Diligence and Integration (Part 1)

  1. I agree wholeheartedly with your position. Too often due diligence is focused on getting information the checklist, and that’s good from a backward perspective for legal and finance, but doesn’t tell you anything about how the companies will combine or if anyone is even interested in the result. And just getting the information without using it and looking for what they don’t want you to know, is a waste of effort. That’s why I’m a big proponent of Forward Looking Due Diligence, or better known as Strategic Due Diligence.

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