In this post I am going to provide guidelines on how to carry out a due diligence. These are useful pointers that will allow you to create solid foundations to assess whether your target is suitable for your strategic goal or not.
- Put in place the due diligence team: choose mainly experienced practitioners. The due diligence is not a tick the box exercise and you need to appoint individuals that can spot potential issues and identify the strengths of a deal.
Include in the team a mix of senior and junior members: in this way the junior people will have the possibility to be mentored and coached by the more experienced colleagues and the costs of the due diligence will be limited, without putting the process in jeopardy as the senior members will be able to spot potential issues.
- Choose experts in the different areas of interest that have to be assessed: whilst most companies tend to focus only on the legal and financial due diligence (with disastrous effects on the success of the deal), the process has to be much wider and include cultural, HR, ethical due diligence and more. You need to gather sufficient information in order to determine whether the deal is appropriate or not. People that will be part of the due diligence team have to be experts in the area that they will assess.
- Get the length of the due diligence process right: you have to find a balance between the requirement to gather enough information to make a considerate decision on the target and, at the same time, as the due diligence process can be very costly, keep it to a reasonable length. There is no definitive answer with regards to the ideal length of a due diligence process as it depends on the complexity of the deal and the actual circumstances. In some cases there may be your competitors that are interested in the same target and you have to move swiftly.
- Get the relevant information: there are two types of information that you have to assess a) external => competitors, macroeconomic situation; b) internal => they relate to the legal, HR, comercial, financial, etc. situation. Consider both.
- Get all the members of the due diligence team to cooperate and to communicate with each other: the members of the due diligence team that are in charge of the due diligence of a specific area do not have to work in isolation. For example, the information gathered with regards to the target’s culture may have a significant impact on the financial due diligence. It is common practice to schedule a call/meeting once a week (or more, depending on the timeframe of the due diligence process) and get the head of the different sub-teams to share information about their area of competence.
At the end of the information gathering exercise, the due diligence team will prepare a report. This usually takes form of a SWOT analysis. It will be for the executive team to decide whether to go ahead with the deal or to pass on it.
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