What are the common pitfalls to avoid during the due diligence process?

If you've done your corporate development work ahead of time, clear objectives for the transaction, even before due diligence, should be well-defined. Thinking you need to grow via M&A before truly defining your organization's priorities is growth for the sake of growth, which will likely not end well!

If you don't know what you're doing, you probably won't achieve it... Alternatively, if you lay out clear goals, the path forward will be much easier to travel.

Lack of clear objectives can lead to costly missteps in M&A. Studies suggest that up to 70% of deals fail to deliver anticipated value. A focused approach is essential: define strategic deal theses that align with your overarching corporate strategy, then establish quantifiable metrics (increased market share, revenue synergies, cost reduction potential) to rigorously assess targets against these objectives. This discipline will not only increase deal success but also build market confidence in your overall corporate development strategy.

From the first meeting we have with any target we have a clear investment thesis we are actively operating against. Every meeting after that is an opportunity to validate your assumptions and ensure strategic alignment. Don't over complicate this - if you can't explain the investment thesis in one sentence it's not clear enough and can lead to lack of alignment throughout diligence.

Having clear objectives is necessary for managing overall scope. Multiple advisors and functional teams can lead to Q&A spiralling out of control. The buyer can be far more efficient if the M&A team work with the advisors to contain the information flow. It can be surprisingly challenging to focus on 'necessary and sufficient' and 'mutually exclusive and collectively exhaustive' information, but pulling this off results in speed, quality, reduced fatigue for all, and key risks (or opportunities) not getting missed. Conversely, known risks or sensitive topics can be explored through more than one DD stream for triangulating the truth. A weekly (at least) all-hands call for workstreams to compare notes, and pivot if needed, is invaluable.

In due diligence, overlooking poor data quality is like building on sand—unstable and risky. As a global R&D leader, I've seen too many leap without looking into the data depths. A classic pitfall? Assuming quantity over quality. Take Theranos: high claims, low validity. Focus on data integrity; it's the compass that guides sound decisions. Always vet data with a keen eye—your venture's foundation depends on it.

Everything can be summed up with one phrase, native systems. Request access to native systems, review native data, do your own audit and due diligence study and don’t source it out.

Poor data quality drastically undermines M&A decisions. Erroneous information obscures the target's true valuation and risks, impacting purchase price and post-deal integration. Studies find dirty data can increase potential liabilities by 10-20%. Mitigate this by proactively defining strict data quality thresholds. Work with the target on pre-diligence data preparation and cleansing, implement independent 3rd-party auditing, and factor potential misrepresentation risk into your valuation models. This rigor reduces costly surprises and sets the foundation for successful integration.

Depending on the size of the business you are acquiring the readiness and availability of clean data will vary greatly. Know this, and plan for this. A couple solves we've found is giving really clear templates to targets so we get all the data we need instead of bits and pieces. Secondarily, as needed we will do live sessions to collect the data in-person - such as building a financial forecast together. The devil is in the details, and the last thing you want is something getting lost in translation.

During due diligence, a classic misstep is skimping on scrutinising the team and resources. In my experience leading a global R&D company, I've seen ventures crumble because they bit off more than they could chew. A robust team isn't just about numbers; it's their capability to steer the ship through stormy seas. Ensure you're not just ticking boxes but investing in a crew that can navigate future challenges. Remember, even the best-laid plans falter without the right hands on deck.

Yes, I can very much relate to this. In my experience doing M&A, when the company is new to M&A, often leadership will not think through about building the functional specialty muscle - even when there is a solid expectation M&A is part of the strategy, and this could lead to team members being swapped out throughout diligence, causing interruptions and a sub optimal process. Further, when too many resources are allocated to a given M&A, that is also not good. As you can get duplicate roles, and people stepping on each other toes. As M&A experts, our role is to help educate leadership and provide clarity, and balance resourcing for M&A to help avoid missteps and march towards a successful deal.

DD is definitely a collaborative approach, and an inadequate team (and resources) can of course trainwreck the exercise. However, you need to be careful when you constitute the team. Even when I am project managing a process, I have found that the most valuable team members are those with skin in the game, i.e., the client's team members. Whether it's the acquirer or the target, there should be a predominance of internal parties in the DD team because they are the ones who will have to live with the deal once it's complete and remediate any uncovered risks that could not be mitigated prior to completion or with warranties/indemnities. Plus, they should have a better insight into the commercial risks that they may be taking, for any DD item.

Inadequate teams and resources are a major reason why roughly 50% of identified M&A targets never reach closing. Building in-house expertise is critical; consider specialized training for personnel in finance, HR, and IT to augment core legal and deal teams. Also, actively leverage AI-assisted tools to automate repetitive diligence tasks; this frees up skilled resources for high-value, strategic analysis. Proactive resource planning ensures the right people and tools are deployed at the right time, increasing deal velocity and overall success rates.

Clear roles, responsibilities, and task assignment/management are vital for a strong, effective, and efficient due diligence process. Recognizing what is missing regarding input and expertise, and addressing those gaps, will lead to much more success in transactions.

I have found over many decades/transactions that centralised coordination and project management of the due diligence process (in the hands of one anointed individual) is the single most important factor required to produce a successful process. What matters is that the process is thorough, complete and efficient. This is unlikely to happen unless the process is centralised. The project manager must be responsible for overseeing the 'journey' of, and communicating with, each team member, and facilitating communications between team members (so they can piggyback off each other's findings) from the start, to the final report of the DD committee. There is no software substitute for having a thinking human being in the middle of it all.

Insufficient communication massively damages deal outcomes – studies show up to 40% of value erodes through misalignment during integration. To combat this, focus on 'soft' factors alongside numbers. Prioritize building rapport with target management; frequent check-ins pre- and post- LOI foster trust crucial to later integration success. Additionally, formalize an internal communication cadence for your deal team. Centralized repositories for diligence findings, with access permissioning, reduce knowledge silos and streamline decision-making. These actions create a more resilient transaction.

Over-communicate. Easier said than done but extremely key to every M&A transaction. Ensure that at the center of your diligence and integration is a strong communicator who isn't afraid to pick up the phone and be direct. Additionally, create clear systems and processes that enable transparency across all functions of integration. You need the right hand talking to the left at all times and without a mechanism to do so it is easy for things to be lost in translation.

Neglecting the human factor is a top cause of M&A failure, with some studies suggesting it accounts for up to 30% of deals falling apart. Remember, target employees are a primary source of potential value. Proactively identify key talent and their motivators. Utilize sentiment analysis tools on employee communications to gauge potential morale threats to integration. Then, tailor your retention strategy and communications to address specific concerns. This focus not only protects deal value but also creates goodwill and accelerates post-merger productivity.

Cultural alignment is at the core of every successful M&A transaction. One of the best ways to approach diligencing this is to lead with your values and be extremely transparent about your culture. We've found that when doing so it immediately puts the other party at ease allowing them to share their values more transparently. Additionally, we believe that in every deal the team should feel as though they are winning when they join your organization. There should be greater opportunities for them across everything from learning and development to role progression. The sooner you outline and share this the better.

Journaling helps. Journal down the best, worse deal reflect through on the question, process and methodology. Find that sometimes on a more human level on how you are feeling on the day itself influences greatly on this decision. Like to think the human factor is out of the equation but no unfortunately, is here to stay so learn to manage it.

Conducting a brief post-mortem after every deal and noting where you can better optimize your process is key. Each deal is different but the lessons are always there as is the opportunity to better tighten up your workflows across diligence and integration.