DD not really important
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Dear all,
I want to throw out there the provocative notion that a due diligence is not that important especially if you have key drivers that are based on revenue synergies like taking over market share or existing manufacturing capabilities. Especially as DD are never accurate anyway.What’s your take on that?
Thanks for your input and happy to be corrected 😉After the pandemic era and as per the uncertainty of the market activity right now, the robust due diligence, is the key stage for both the buyer and seller gain a thorough understanding of each other, market, risks, and will help negotiation terms and conditions it will help to make an informed decision-making and increasing a successful deal possibility
Yes, revenue synergies are often a primary driver for the deal. However, due diligence is still critical as it validates whether those synergies are realistic. Without it you might overestimate revenue potential or overlook integration risks.
In my experience it all depends on the size of the deal and the resulting level of rigor that is warranted and expected by all the stakeholders. Using your example, if you are expecting revenue synergies but don’t do due diligence (at least basic) on the revenue drivers of the target (customer contracts, customer concentration, etc.) they you can’t be sure that revenue synergies would even occur, no? Sometimes, in certain areas where rigor can be low, we do a basic level of due diligence called “disaster check” which is very high level and not super detailed or time consuming. Hope this perspective helps you in some way!
I think the level and value of DD is highly dependent on the size, complexity and type of the business being acquired. Certain things like cultural fit should never be overlooked or they can destroy value quickly. If the deal size and complexity are small and the risk is low, the cost of a deep dive on due diligence may not make sense.
I like the provocative nature of your post. Flipped another way, you’re saying that if a deal thesis is driven by revenue synergies, which are based on highly unpredictable forecasts, how worthwhile is DD. There is some truth to this in that the range of realistic forecasts is too large to be of great value. However, I would argue that your purchase price should be based on the non pro forma target company value, and therefore DD on the existing business is paramount. If synergies are majority revenue, then I agree with your statement in that DD on those synergies could be of limited value.
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