Earlier in my career, the thought of going through due diligence on the business I was in, where I was responsible for Technology, used to send a shiver down my spine. It was almost always conducted in a Board room by an emotionless individual who was billed as a hired gun looking for the hidden secrets, almost like finding the weakness of the Death Star, so they could blow up the deal, or insist on lowering the value attached to the Technology part of the equation.
They were without a doubt equipped with an endless Excel spreadsheet, which had been built up over several years and never differed, regardless of the business they were assessing. As a result, a lot of time was wasted by insisting on asking questions that appeared in rows on the spreadsheet even if it wasn’t relevant to our business. It was a truly terrible experience and not one I would want to subject any business, or individual to when I undertake due diligence.
Spin forward five years of undertaking countless due diligences for a number of Private Equity and Venture Capital businesses, across a multitude of sectors and with businesses at various stages and often requiring travel to far flung places, I’ve arrived at a way of undertaking a due diligence that I feel comfortable with and most importantly so does the business I’m talking with. What follows are some of the key takeaways that I find work best.
DUE DILIGENCE PREPARATION – 3 TIPS AND 4Ps
1. Always contact the business you’re going to meet ahead of you going in to talk with them. It can be an email, a call and video conference, but make sure you meet them to attach a human to the name of the person they’re going to meet;
2. Give the business a heads-up, ideally a week before your visit, on the topics you’d like to discuss so they have time to prepare. This list of topics/questions must be tailored to the business you’re going to meet and not one you downloaded from the internet or used for your last due diligence. It probably only takes 15-20 minutes to write this note and will increase the productivity 10-fold of any due diligence session and put people at ease as they know what you want to discuss;
3. In terms of the themes that I like to cover, they revolve around the 4 Ps – People, Process, Product and Platform. Below I’ve outlined some examples of things I could cover:
- People – what makes the people in the business tick, what do they enjoy doing, what are their perceived weaknesses, how are they equipped to adapt as the business scales and are they collegiate in their working ways?
- Process – what processes are in place around the formulation of the Product & Technology roadmaps, do they practice Agile, are they in a regulated environment and need to demonstrate compliance, how do they handle things like releases and what’s their approach to GDPR?
- Product – take in a demo of the product, place yourself in the shoes of the customer and look at the UX & UI and see if it works as it should, is the interface quick, is the application responsive for mobile usage, is there a separate mobile app and does the interface seem quick, or sluggish?
- Platform – is there monitoring in place, is there a disaster recovery or business continuity plan available to review, when was the last outage and what was the route cause, is there an established support cycle for outside of office hours and when was the last penetration test undertaken?
Out of all these themes, the most important aspect by far is the people side, as no matter what’s wrong with the other elements they have little chance of being able to adapt without the right people in place.
DUE DILIGENCE – 3 ON SITE TIPS
1. When you’re on-site, keep the sessions informal, ask questions that lighten the mood and takes the focus off the material and remember you’re dealing with people and not computers. Ask them how their day has been, what they’re up to in the evening and share some things that are relevant to you – how long the drive was, what you did earlier in the week, etc. This helps breakdown some of the communication barriers and helps build relationships.
2. Don’t spend time on things that aren’t relevant and adapt the agenda as the day goes on based on the information that is shared. Make sure you make notes on things that are important but make sure it is not at the determent to the flow of the session.
3. Given the importance of the people theme, make sure at least a third of the time on site is dedicated to meeting people in the wider business one-on-one. Depending on the confidentiality of the fund raise it is not always possible to meet people from the wider business, but you should always have access to the senior team, so take some time out from the group sessions to spend with them. If you do meet the wider team, make sure you put them at ease and don’t come across as the hired gun from earlier in my career!
DUE DILIGENCE – 2 FOLLOW-UP TIPS
1. When you’ve finished on-site, always take time to order your notes, either in the hotel in-between days, or maybe stop on the drive home to take half an hour to reflect on the most important things coming from the due diligence. If you’re flying home then you have the flight or a portion of the flight to get your thoughts in order. I then always like to sleep on the output of the sessions ahead of writing the report, your brain has a natural way of sorting through things as you sleep.
2. When you come to writing the report, I always give a quick intro as to the purpose of the due diligence, who I met with during the day(s) on-site, a summary of the key findings and then finally a deep dive on each of the 4 Ps to substantiate the key findings. Often, I’m asked to provide a simple chart on the priorities, so they can feed into the 100 / 365-day plan.
Matthew Batchelor is an Aziz Executive Mentor with a wealth of experience as a CTO and mentor in B2B and B2C markets.
