Won’t Somebody Please Organize Due Diligence?

I have come to believe that one of the industries that is most in need of consolidation is the Due Diligence Checklist industry.  It makes me want to scream.
Listen, if you are creating a due diligence list for publication or broad consumption, unless your list covers the entire equatorial spectrum of possible topics in relatively equal depth, do not imply completeness.  Do not label your document something stupid like “Due Diligence Checklist.”   It’s a lie.  It suggests a level of breadth and thoroughness that is not there.  That is dangerous to people legitimately trying to practice the trade of deal making and acquisition integration.  Grrrr.  You are definitely pissing The Merger Verger off.
I recently read an article discussing due diligence for high technology companies, written by a Silicon Valley attorney.  The piece was 18 pages long, of which five were a “due diligence checklist” organized into six categories.


Now get this: the section entitled “Financial Condition” had four items listed (I didn’t even have to count them; they were numbered). That’s sure been my experience: round up four or so items of financial data and that part of your due diligence is …


Beer anyone?

Were that not bad enough, there was nothing – zero – on HR, nothing on corporate practices or culture, nothing on the sweeping Alpine vistas of corporate complexity.

Now, I have no problem whatsoever with a due diligence list that is focused on this aspect of a deal or that aspect. In fact, I think that’s the way it should be.  Just don’t call them more than what they are. It’s a small point; I get that.  But the implications are large.

We – deal makers, all of us, regardless of our specialties – need to be honest with ourselves.  No one of us is capable of producing an All Points due diligence checklist.  And no one should purport to do it.  This is too important a topic not to have our acts together.

Suggested Best Practice:

  1. Create the full sweep of legal, financial, operational, HR, and strategic due diligence procedures (including checklists) founded on specialized expertise from each area.
  2. Keep those procedures and lists organized separately to better enable dedicated teams to focus on the areas of their purview.
  3. When assembling a due diligence list focus on the specific area of your professional expertise and label it simply and honestly, e.g., “Due Diligence Checklist: Human Relations,” or “Legal and Organizational Due Diligence Checklist.”   To do otherwise is a prescription for confusion and incomplete analysis.
  4. In your company’s Integration Handbook, keep distinct due diligence checklists organized by specialty area.  Ensure that all areas are covered by separate lists.  Update those lists during and at the end of each transaction to codify new learning for the future.

I welcome other suggestions on how to manage the process of due diligence.  The effective obtaining and using of thorough corporate information in an acquisition is the absolute cornerstone on which a successful deal is built.  The stronger that cornerstone, the stronger the prospects for your deal’s success.

It is …




The Empowerment of Mistakes – 1

Mistakes in the business place are all too often shoved under the carpet or patched and passed on.  Here at The Merger Verger we think that is the wrong strategy altogether.

A company was holding its quarterly divisional managers’ conference call and asked me to participate.  The CEO did his thing and then all the division guys reported on the quarter just ended. 

After the call was over the Chairman/owner asked me what I’d thought.  I told him that I was highly skeptical of the whole thing.  Ten divisions each reporting on three months of activity and not one thing had gone wrong?  That’s the equivalent of one business functioning for two and half years without a single problem.  No.  No!  That’s not what happened; that’s just what got reported.

When a manager reveals a problem or a misjudgment, he is opening the door to his colleagues and saying, “I don’t want you to experience the same problem I did; learn from my situation before it happens to you.”

This practice of encouraging error-sharing enters the realm of acquisition integration at two levels:

Building an Open Culture

  • The revealing of mistakes, unforeseen problems and dropped balls takes courage.  It has one and only one upside: learning potential. If you want to maximize that potential you must build a culture that supports it.  People fundamentally want to be honest but although in the wrong environment their self-protective instincts will quickly override.  An error-sharing culture may take seed by itself but it must be fed and nourished continually from the top in order to multiply.  
  • If you already have that culture in your organization, remember that it will face doubters in an acquisition target.  You must vocalize the policy and its importance frequently to your new employees.  More importantly, you must spotlight examples that model the behavior whenever they occur. 
  • If the target brings to you an environment of openness and error sharing that you do not already have, put it high on your list of things to back-build into your own company… or at least take concerted steps to see that any close-to-the-vest attitudes at home do not squash the constructive example coming in from outside.

Stopping the Dominoes

  • From the angle of a mistake as a learning opportunity, you should think of them as tools, as assets.  Like any tool, the more it sits on the bench or in the warehouse, the lower your return on it.  Put the tool to use.
  • This is particularly true for companies that are consolidating industries, say, through a roll-up or geographically diverse bolt-ons.  The problems or missteps experienced in one unit have a high likelihood of emerging in other units if you don’t empower your managers to share those errors and the lessons learned from them.  It may be that no distinct lesson has been learned other than to watch out; that alone is a useful observation.  If you don’t share operational miscues, you are setting yourself up like dominoes to have the problem befall you again and again and again down the line.

Do I need to add here that the integration team should also be learning from its mistakes?  This is particularly true for companies where the acquisition activity is not constant or where the integration team may be run by a different leader the next time.  All kinds of studies show that the companies that learn from both the ups and the downs of their previous acquisitions and codify that learning in a written Integration Handbook are more successful at making deals work.