The Importance of Pre-Diligence in the M&A Game

We all use the term “heads-up” in our everyday conversations. As a noun it means “an advanced warning of something” equally importantly as an adjective it means “showing alertness or perceptiveness”.

Properly executed pre-diligence, in advance of a potential acquisition, delivers the critical and timely information required for the buy side to determine if there are red flags that will jeopardize the value of the acquisition target. The key categories required to be reviewed include Industry, Customers, Competition, Sales, Financials, and Product. In most cases the diligence needs to be performed in a very short time frame without the benefit of the usual large amount of information, access to data rooms, employee interviews, extensive financial information, or expansive reviews of product, legal, and IP assets.

It takes an experienced team with good footwork to be able to successfully deliver a pre-diligence report that the potential buyer finds valuable and actionable. The starting line is at the moment the seller’s representative, normally an investment banker, is making the initial pitch to the potential buyer. At this moment the pre-diligence experts will have the opportunity to hear the sellers pitch and meet the executive team. An experienced pre-diligence team will be able to ask the types of questions required to uncover any red flags that the buyers need to be aware of.

Following the initial meeting the key is how to digest and distill the information revealed on the call, conduct the necessary additional research, and deliver a report that has the value the potential buyer requires. There are two keys to the information to be provided, strategic value and timing. In other words, will the information provide the potential buyer with the ability to determine if their potential bidding price is on target and what, if any red, flags exist that they need to be aware of when putting together their offer and strategic acquisition plan. In terms of timing the report needs to be delivered 1-2 business days following the initial banker’s presentation.

Various types and styles of reports, from lengthy ppt presentations to fact filled reports are often the deliverables for this application. In my view a simple multi-slide SWOT analysis by topic with the proper companion assessment grids is the best approach. The SWOT is flexible to any industry, universally understood in global applications and provides a quick read visual that helps the potential buyer hone in on areas of concern.

Examination category examples include:

Industry: Seller’s industry trends, analysts’ POV, potential disruptors, macro trends, government regulations, environmental hotspots, geographic elements

Customers: Engagement, loyalty, churn, risks, revenue contribution ranking, NPS & CSAT ratings, lifetime value of customers

Competition: Top 3 competitors, emerging companies, potential disruptors

Sales & Marketing: Pipeline, sales team, website, lead generation, marketing organization

Financials: Financial health checkup, expense to revenue %, rev per HC, revenue trends, P&L

Products: Market share, product roadmap, development teams

Assessment scores vary in styles and format, my favorite is a simple red (limited capability), yellow (requires moderate improvement), and green (strong capability) rating system that provides the potential buyer with a quick read scorecard and brings attention to area of concern that may drive deal value lower.

Considering the current valuations and the competition that exists on deals, every potential buyer should consider a properly executed pre-diligence step prior to moving to next steps on an acquisition target…it is the ultimate “heads up”.

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