Beware of those who say Due "DiLLigence"

According to Wikipedia, a Due Diligence is "an investigation of a business or person prior to signing a contract, or an act with a certain standard of care".

This definition is quite accurate and reflects what we all should do before entering a transaction. 

Real life experience shows though that, what should be a mere exercise of prudent business review, sometimes turns into a costly, resource and time wasting exercise.

I recall two quite striking cases.

Case Nr 1

One day I was invited at very short notice to Berlin. The communicated reason for the meeting was to prepare discussions for a possible IT outsourcing. When I enter the room which was located on the premises of a famous local hospital, I saw following scene:
a large space with 1 chair, 2 large tables, 20 thick folders on those tables and a smiling colleague from the sales department. The colleague started with something like "good morning Mr. di Bari, Welcome to the Data Room. These are all the documents you need. Please make sure that by the end of the day we have everything we need for this transaction".

Case Nr 2

Recently I was involved in a potential M&A transaction. The discussions have been going on for 12 months without any measurable progresses, when by chance I happened to become involved. I spent some time listening to the views of the parties and quite quickly became clear to me why there were no progresses (For a change it was the difference between price and value). I managed to agree on a range and then we defined a transaction structure and finally a schedule for the due diligence. Everything was going the right way until.... Enter the Headquarters and the Investment Bankers. Even though we agreed on an asset deal taking over an handful of assets and people, my team and I have been forced by the "augurs" above into a very expensive, time consuming and absolutely wasteful due diligence on items we did not event want by any means to consider in the transaction and whose legal and fiscal history, present and future had nothing to do with the business. "Because we have always done like that". "Because the headquarters want it". "Because we (investment bankers) think it is a good idea". An so on.....


For the few of you who are curious about my reaction I can tell you the following:

On case Nr 1 After having carefully verified that I was not a victim of a practical joke I had to call "Houston" and ask to push the reset button on this entire story. We never started again because the transaction at a closer look, was nonsensical from the beginning.

On case Nr 2 After having verified the complete unwillingness to listen by some of my bosses and colleagues, dressed with a bouquet of "yesbuts", I closed my eyes, sat tight and went through the process dreaming of the many things we could have done better and more efficiently with the time, nerves and resources wasted. We closed this transaction and was a very good deal for all. Especially for the consultants.

Here my learning on the Due Diligence :

1. if you are buying an entire company or a subsidiary or a line of business or if you are entering any agreement where you have to rely on statements or have to purchase rights assets and obligations, an extensive due diligence, supported by robust covenants and warranties is what you would consider doing
2. If you happen to be the boss or one of the top managers of a company please make sure that NOBODY in your organisation except the CEO TOGETHER with the CFO can start plan or execute any Due Diligence (let alone a letter of Intent) without proper authorisations. 
3. Finally beware  the creativity of the sales people and all those (investment bankers and consultants) who still after many years write due "dilligence". 

Here is the first  CLEARCUTCASE©: The main scope of the due diligence is to verify ALL the major assumptions that support your credible, validated and very conservative business plan. Further you would like to verify ALL the deal breakers and major risks that you have thought of BEFORE you prepare the business plan for the valuation, hence BEFORE the Due Diligence. 
If you are happy about the findings, then fix them in the contract. If you are not, correct the price, increase the warranties or exit. 

Here is the second  CLEARCUTCASE©: the best M&A transaction is very likely the one you decide not to execute 

Make sure that you brief your team very intensively on business plan assumptions, deal breakers and major risks before they start. At the end of each business day you let every team meet the others and wrap up the findings.

I am at your disposal 

Francescodibari.eu
francescodibari@blogspot.de