Due diligence is an evaluative learning process with the goal being to examine any commercial transaction that is critical for specific business performance or success. These vital audits often reveal valuable information, identify potential challenges ahead and spark ideas.
The focus of due diligence can be towards potential suppliers, partners, investment decisions, strategy or organisational restructuring, a common example being mergers or acquisitions.
Due diligence can be divided into three primary categories – legal, financial and strategic.
Legal due diligence is usually conducted before asset or share sale transactions and involves the investigation of items such as corporate commercial contracts, regulatory compliance, property or litigation. By investigating a company’s obligations and liabilities, objective information can be revealed and used to limit the risks and influence how or whether to proceed with a proposal.
Financial due diligence reports on the financial health of a company and considers aspects such as trading history, projected performance, profit trends, balance sheet and management accounts analysis to gauge debt and equity value. This type of due diligence helps to determine commercial risks, opportunities and viability – in essence the likelihood of the transaction achieving its objective.
Strategic due diligence is arguably broader and considers a business’ micro and macro-environmental factors, connecting the legal and financial considerations with a longer-term focus. Essentially strategic due diligence asks the question, “Can a business plan hold up to the market realities?”
Some questions which may arise from strategic due diligence include:
The commercial dealings of companies will differ which is why due diligence is useful as it can be moulded to various business stages and applied to different events and cases. Strategic or commercial due diligence is highly valuable in determining commercial attractiveness.
The way it is performed is evolving towards a multidisciplinary, consultative approach involving a hybrid of information in order to gain a valid perspective of a company’s competitive position in the market.
Properly conducted due diligence is similar to a “Backward” market research process, whereby there is a preliminary understanding of what strategic gaps are currently present. By understanding the information gap and knowing the possible actions that could be made based off them, the research design can be better planned and tailored. Essentially, determining how research will be used to figure out the problem. Some businesses often opt to identify unknowns based on a problem then proceed to reduce ignorance – having unclear questions to begin with is likely to lead to unclear answers.
There are advocates of quantitative information being used to guide future decisions, however there are those that believe that historical data is not enough such as Peter Schiff – CEO and Chief Global Strategist of investment advisor Euro Pacific Capital, known for his accurate prediction of the housing market collapse in 2007 and subsequent financial crisis in 2008. Ultimately, current context is key and fact and figures are not enough.
Those without the internal capacity or capability to execute and obtain high-quality strategic validation commonly look to outsource through corporate research organisations, management consultancies and companies providing due diligence services.
Below are different due diligence diagnoses you can expect to be performed by a due diligence specialist:
Those looking to conduct commercial due diligence or those with specific research goals should gather information which supports their business position and targets. Commercial due diligence should provide specific, reliable and timely insights. Those that perform it properly can then form the best strategy to be deployed to achieve strategic advantages which are scalable for further future success.
In recent decades there has been a shift in how strategic due diligence is acquired with companies looking for more flexible and fast methods of information collection.
Expert network companies – matching and connecting clients looking for specialised knowledge with subject matter experts – are entrusted by a full range of business types including consultancies, private equity firms and institutions. They provide timely, high-quality consultations stemming from a unique vantage point. Expert network services facilitate a fast flow of contextualised knowledge exchanges which then proceed to inform the investment decision makers, strategic directors and researchers who are involved in the due diligence process.
To maximise your internal resources and external consultations, it is recommended that you outline your strategic goals and business objectives. Being clear on this is crucial in informing the design of comprehensive questions around your business issues, challenges, opportunities and information needs.
Creating a commercial due diligence checklist will provide an organised pathway to gather intelligent information and ensure you do not overlook details which may be crucial to the insight you wish to gain.
A due diligence checklist will allow you to examine items/ aspects such as plans, assets, liabilities and concerns. The points on your checklist can be categorised to support your understanding. Some examples are below:
When you are at the stage to proceed, a decision needs to be made on which route will enable the expected quality of information to be delivered to you. Accuracy, timeliness, completeness and reliability are important factors, thus being aware of your deficiencies will help you decide on the expertise and services you need.
If you have decided to get your information externally, to make sure your research is most effective, then you should prepare any supporting documents, briefs or agendas fully and tailor it to the service format you will be receiving.
In the case of expert network consultations, their compliance frameworks are robust and the screening procedures and shortlisting process are known to be very highly customised – this level of comprehensiveness and structure, combined with experts who are leading their field is what makes this type of expert information so valuable.
The due diligence process deserves patience, planning and thought due to its potential to incorporate numerous disciplines, sources of information and depths of technical knowledge. The choice made on how strategic due diligence is to be conducted will have a significant impact on the resulting insights.
The quality of information sought is crucial and can easily be determined as well as influenced by the business plans defined. More pertinently, the value of information gathered can hold long-term value or quickly become obsolete depending on who the due diligence research is conducted by.
Pangea Strategic Intelligence understand that business leaders are increasingly seeking to make better-informed decisions at greater speed to remain competitive. Strategic and commercial due diligence can be crucial in providing substantiated, quantitative expertise and confidence to the ensuing business decision.