Two methods to ease due diligence indigestion

In the world of private equity and growth investing, due diligence is a critical process that underpins investment decisions and shapes post-deal strategies. However, the sheer volume of information generated during due diligence can be overwhelming, leading to what we might call "due diligence indigestion." This occurs when valuable insights are buried in lengthy reports, dispersed across multiple documents, or simply overlooked in the rush to close a deal. The result? Significant value is left on the table, and opportunities for smoother post-deal integration and value creation are missed.

To address this challenge, two methods have proven particularly effective: the due diligence provider roundtable and the post-deal pre-strategy workshop. Let's explore how these approaches can help investors and management teams extract maximum value from the due diligence process.

1.The Due Diligence Provider Roundtable

Traditionally, due diligence workstreams operate in silos, with each provider focusing on their specific area of expertise. While this approach ensures depth, it can lack the synthesis necessary for a holistic understanding of the target company. The due diligence provider roundtable aims to break down these silos by bringing together representatives from key workstreams – such as financial, commercial, operational, technical, and management/organisational due diligence – for a collaborative session.

This roundtable, typically lasting about 1.5 hours, takes place towards the end of the due diligence process but before the final investment committee approval. The session is structured around cross-cutting questions that encourage providers to offer insights from their various perspectives. This approach can yield "three-dimensional" insights into critical issues such as financial dynamics, strategic choices, product roadmaps, and organisational scalability.

The beauty of this method lies in its efficiency and synergy. For a minimal additional cost in time and money, investors can gain a much richer understanding of the target company. It allows for the identification of interconnected risks and opportunities that might not be apparent when reviewing individual reports in isolation. Moreover, it can highlight areas where further investigation might be necessary before closing the deal.

2. The Post-Deal Pre-Strategy Workshop

Even with a pre-deal roundtable, there's often a need for further digestion and alignment once the deal is closed. This is where the post-deal pre-strategy workshop comes into play. This half-day session brings together the management team, newly appointed Chair, and investor directors before diving into formal strategy and value creation planning.

The workshop serves multiple purposes:

• It allows board members to properly introduce themselves and clarify their roles, creating a foundation for effective governance.

• It provides a forum to discuss and digest key themes and questions that emerged during due diligence.

• It offers an opportunity for the CEO, no longer in "pitch mode," to present a realistic overview of the coming year's growth and development plans.

• It enables the identification of quick wins and critical decisions that need to be addressed in the upcoming strategy process.

Importantly, this workshop helps set the right pace for post-deal activities. It allows for a thoughtful discussion on balancing immediate business-as-usual needs with longer-term value creation initiatives. This can prevent the common pitfall of rushing into ambitious plans without considering short-term operational requirements or team bandwidth.

The Value of Facilitation

Both the roundtable and the workshop can benefit from skilled facilitation. An experienced facilitator can ensure that discussions remain focused and productive, drawing out insights from all participants and helping to synthesize key takeaways. They can also help navigate potentially sensitive topics, ensuring that the sessions contribute to building trust and alignment among the new leadership team.

In conclusion, the due diligence provider roundtable and the post-deal pre-strategy workshop offer powerful methods for combating due diligence indigestion. By fostering collaboration, synthesis, and alignment, these approaches help ensure that the valuable insights generated during due diligence are fully leveraged to support post-deal success. In the competitive world of private equity, where maximizing value creation is paramount, these methods provide a cost-effective way to start the investment journey on the right foot.

None of the conclusions are especially surprising but it is interesting to note:

The sense of dilemma between investors seeking necessary insights and worries about using up goodwill in doing so. In our view, that dilemma can be resolved and even turned into an advantage if team and organisation work is turned into a genuine value-add. But that does require work by investors and providers to frame the purpose of the exercise in developmental terms and shift language away from ‘management due diligence’.

See further thoughts on that here: https://www.catalysis-advisory.com/blog/why-management-due-diligence-mdd-needed-to-evolve-into-team-and-organisation-strategy-and-beyond-zw9z6

Perceptions that deal team assessments of teams and third party work are substitutes for each other. In practice, the deal team needs to form an initial view of management well before any DD workstreams are initiated, and will likely oversee any actions on the board post-deal. So, this area is a core skill area for investors in all cases. On the other hand, third party input in this area – like for other DD streams – can be valuable where it allows initial impressions to be tested, widened (e.g. to second tier), deepened (to team and organisation issues) and turned into a roadmap.

One issue seems underplayed here, namely how investors – whether supported by third parties or not – can digest learnings about management (at individual, team, organisational and governance levels) and weave them into a coherent plan. We are big fans of pre-strategy workshops where due diligence outputs are digested, quick wins spotted, board roles clarified, themes for strategy sessions identified so that the early post-deal period is not dominated by the (mostly very mundane) 100 day plan list.

You can find more thoughts on that here: https://www.catalysis-advisory.com/blog/how-can-activities-across-deal-cycle-be-value-adding-jf82p