Due Diligence is not just about the numbers
As the nights draw in after a tumultuous year, a glimmer of light is emerging. Heightened confidence, if not complete certainty, in the new Covid 19 vaccines and, of course, the outcome of the US Election, has eased the tension. And, while general trading performance hasn’t been fully restored, it is appearing, perhaps, to be rather less disastrous than early predictions suggested, and the global markets are beginning to strengthen.
Nevertheless, 2020 will have been a year that became the inflection point for many businesses as they are forced to redefine their strategy and restructure. We are already feeling the temperature rise in the PE markets as deal flow resumes, but are investors (and corporate M&A) allocating as much time looking at the quality of those people in whom they are keen to invest as they are on financial due diligence? The honest answer, whomever you speak to, is no. This is not that they do not believe in the concept of leadership or management due diligence, it is ore about timing and that this is not, dare I say it, as close to their natural interest in the numbers. The comfort around financial data delivers confidence around “what” the business has done and has the potential to do going forward in any certain market scenario; the bit they are missing is the “how”.
So, the market fundamentals have changed and now the capital structure has changed – to me, it sounds like a lot of change to the business foundations and probably represents rather more risk than anticipated. Perhaps it is prudent to spend a bit more time understanding (rather than hoping) who has the stretch and is likely to be successful in such a period of transition, change and to some degree, uncertainty, and who will find that their elasticity challenged.
While batteries of psychometric testing might satisfy that DD appetite for data, and some are very illustrative, they remain one data point and sometimes exert more influence on a decision to hire (or invest) while failing to support the process of managed transition. We have found that more context driven, impartial deep dive due diligence goes further to validate, or otherwise, experience and track record, and the protestations of nominated referees, and helps to accelerate integration.
This is not just about risk mitigation, while that would undoubtedly be helpful, it is also about identifying how senior leaders operate in a certain culture/ context. These are people whom you are holding accountable so helping them get traction quickly and understanding what support they need to lead their business to be successful must be a priority.
Under the banner of ESG and responsible investment, and indeed making senior level corporate appointments, maybe more should be done in the DD phase to look at the human element; if the numbers stack up, do the people stack up, does the real person stack up? If the business has potential but the people are at their natural ceiling, knowing who has the stretch to be developed and what upskilling might be worthy of further consideration is a responsible and ethical action. We have all seen tissue rejection and its cost to the business goes far beyond just the irritation of having to find a replacement. The symptoms of a toxic leadership culture, or the deselection of trusted peers and employees, disaffected customers and suppliers, and diminishing stakeholder confidence are long lasting and time costly to rectify. They can and will impact enterprise value, and they often stem from a poor appointment decision. If Boardroom walls had ears, I bet that they would have overheard comments such as “why didn’t we know more about that person before we invested in him / her”, “we didn’t see that coming, but now it seems so obvious”, “they were just wrong for us”, through to, “thanks goodness they have departed…if only they had gone earlier”.
The Trusted Advisors Partnership provides Due Diligence support in the following scenarios:
- Private Equity – pre and post deal (especially helpful if transitioning from owner managed)
- M&A
- Corporate appointments (Board, ExCo and Senior Leaders)
We specifically work with:
- Corporate Finance advisors / M&A
- Private Equity Investment Committees / Directors
- Portfolio Company Chairs
- Corporate Chairs and Chair of Nominations Committee
- CEOs
- Group HR Directors
- Group Resourcing
For a further discussion, please contact Ben Williams (Private Equity) and Toby Lapage-Norris (corporate).
Ben Williams
Partner
+447825778691
Toby Lapage-Norris
Founding Partner
+447767870302
www.TrustedAdvisorsPartnership.com