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The main logic behind due diligence activities is to bring the in-depth value. however there are many challenges comes with it such as
* Inadequate valuation
* Slowness of execution
* Unplanned costs
* Lack of expertise
* Sunk Costs
what are your thoughts on how to overcome these challenges? and what are other challenges you may have faced?Agree with this – especially as it remains difficult to quantify these elements, as it involves so many unknowns. Plus at the moment, with travel difficult, it really hampers fully understanding a target’s culture.
In my opinion some common challenges in DD process are:
-Information asymmetry between buy-side and sell-side during the deal
-Longer duration to complete the DDs process.
-High costs involved in the DD process due to long duration period
-Communication problems between buy-side and sell-side
-Lack of accurate data to make effective decision making in the deal
-Lack of access to full data disclosure to reach decision making
-Sunk costs should the buy-side opts out of the M&A process during DD.I would like to add a famous quote by Peter Drucker: Culture eats strategy for breakfast. As long as human capital is part of a deal, the buyer must ensure that culture perspective is handled with care, sensitivity and open but straight communication.
My views are that the entire DD process (which covers all the functional DDs) are extremely important in the M&A process and is of utmost strategic relevance and will also ensure sustenance of the “future” organisation if done properly. Else it could have serious ramifications.
The directive to ensure a deep dive and credible DD must come from the CEO/Top management and the apex committee must comprise of senior management to give this process its due.
There could be inhouse “lack of expertise” however this is not a serious concern as there are consultants having such expertise and available in the market.
The slowness of execution also depends on the eagerness of both buyer and seller and in order to avoid slowness, appropriate terms needs to be mentioned in the SPA.
Costs need to be budgetted as I personally feel that such costs can be easily cushioned in the synergies if done properly. I have handled 7 M&A’s globally and really do not find the unplanned costs as a matter of great concern unless such costs overtake your synergy numbers!Be focused on what the key diligence items are depending on the kind of transaction and the logic for doing so – and then ruthlessly focus on those factors to be most efficient.
Regarding the lack of expertise, I can relate. Smaller companies don’t necessarily have a lot of experience with due diligence or M&A overall which presents challenges and added time learning and likely re-inventing the wheel. I imagine larger companies have designated resources, but for smaller companies looking to be involved in the M&A space, are there designated resources you can hire? Or would the group recommend to have a designated person in house?
A challenge I have faced with this topic is management not involving HR in the due diligence process or at minimal levels. Everything else gets figured out after the fact which is definitely not optimal in my opinion.
one of the common challeng is the qualtiy of provided data and information in the VDR as well as language barrier which will impact schedule.
For deals where an internal team is taking the lead on due diligence, I wonder if an iterative process with debriefs with the DD team and the seller giving candid feedback on their experience after each deal would be helpful. I think this is cultural but even with an organization, culture can vary across departments.
I think some organisations specially in Asian region, they want things done fast and don’t want to follow the international guidelines which are there for protecting the parties.
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