An acquisitions attorney took a rather frustrated call from his client following the completion of an acquisition, with the awkward question regarding a particular operational surprise: “Why didn’t you think of that?”  It’s easy to imagine that the client had earlier asked for a comprehensive due diligence checklist, expecting more wisdom from such a list than is warranted.

Of course, diligence checklists can be invaluable to assessing a potential target.  However, a CFO is well-advised to look beyond checklists when evaluating a potential company for acquisition.  Even the most “complete” checklists are typically limited, to facts and figures, legal documents, and other topics subject to a black-and-white determination.  As the chart below highlights, due diligence should be considered more broadly to include market conditions external to the target as well as more subjective areas that are integral to realizing value and assessing risk from an acquisition.

The more subjective areas of diligence are also, by definition, ill-suited to yes-no determinations.  They must be more thoughtfully considered, for example, by scenario analyses and discussion of potential surprises and uncertainties.

Certain risks and uncertainties may be managed satisfactorily through purchase agreement provisions, such as representations and warranties, escrows, and specified disclosures.  And certain potential surprises may be identified through effective due diligence.  However, “check-the-box” diligence lists are no match for more subjective analyses with respect to customers, competitors, people/organization, and dynamic company/market conditions related to the transaction itself.

Below are five recommendations that may be valuable advice to both experienced and less-experienced acquirers.

  1. Beware of checklists – Our research from over 100 interviews with company executives and their advisors indicates that the risk for major post-closing surprises may be highest in more subjective business areas such as those related to organization, business processes and information flows, customers, suppliers, competitors, and broader market conditions. Such surprises are far beyond the scope of checklists, which may provide a false assurance that all the bases have been covered.

“Middle market companies tend to overlook key risks in due diligence by relying on in-house or inexperienced due diligence advisors.”  Middle market executive

One CFO required even seemingly “routine” due diligence assessments to be shared in an open forum with a wide range of operations, finance, human resource, and technical diligence teams sharing their findings.  Such an approach improved identification of issues and preparation for integration.

  1. Use “scenario analysis” along other diligence to prepare for surprises
    • The development of a single projection for an acquisition implies an extraordinary level of precision and confidence.
    • Thoughtful discussion of multiple scenarios can provide a planning tool that illuminates fundamental uncertainty or ill-preparedness ahead of completing an acquisition.
    • Scenario analysis, briefly, deliberately explores “what if…?” and “what would/could we do then…?” across multiple possible “futures”. These might especially include competitive response to the acquisition by suppliers, customers, government, and individuals whose careers may be impacted by the deal. By “rehearsing the future”, prudent preparations may be identified ahead of actually confronting post-closing surprises.
    • Perhaps one of the scenarios will be designated as “most likely case” or “base case”. As a practical matter, that’s likely.  But better to do so after the benefit of considering a range of possibilities that may be encountered and should be prepared for.
  2. Temper over-reliance on contractual risk management provisions – In our interviews with deal attorneys, a key theme is the importance of going beyond contractual provisions (e.g., reps/warranties, earn-outs, contingent payments, disclosure schedules, indemnification) to plan for potential surprises. Important as such provisions are, litigation is expensive, time-intensive, and uncertain.
  3. Among the most cited post-closing surprises are those related to people, including the target company’s employees, decision-makers at key customers and competitors, and a company’s own employees whose roles are impacted by a deal.
    • Some surprises related to people and relationships (both internal and external) should be prepared for as a matter of course, notwithstanding employment agreements, pre-closing assessments of fit, and a pre-closing sense of organizational alignment.
    • Elimination of these risks is not an appropriate expectation from due diligence; improved preparations for “what if” scenarios should be.
  4. Utilize a range of diligence and risk management strategies – Acquiring another business may be among the most complex decisions and activities undertaken by a company. Maximizing the outlook for success dictates that potential surprises be matched with a variety of different risk management strategies.  The following chart provides a framework for considering such a range of diligence and risk management strategies appropriate to the complexity of acquisitions.

The inevitability of surprises represents an important, value-enhancing occasion for CFOs to positively impact their company’s deals far beyond confirmatory due diligence.

As an investment banker lamented, “Though experienced [acquisition] people should not be surprised, they probably will be.”  CFOs can set the tone for a diligence effort driven not by generic lists, rather by potential uncertainties, surprises, and preparations for success after the deal closes.

About The Author

Joseph Feldman is President of Joseph Feldman Associates (, a Chicago-based corporate development consulting firm founded in 2003. The firm provides acquisition and other strategic transaction consulting for growing companies and their investors.

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