In any M&A transaction, time is of the essence. According to Investopedia, a merger’s timeframe for completion is between six months to several years. When we talk specifically about the due diligence process the duration varies depending on the complexity and size of the M&A deal.
Sri Malladi, founder of Athena Consulting Partners, a firm specializing in M&A and strategic finance advisory for corporate and private equity firms, has shared his view on the importance of accelerating due diligence and how it can help buyers save time (and money) in their M&A transactions.
The risks of a delayed due diligence
When an acquirer takes too long to conduct diligence and to close the deal, they risk the deal. Among the most common negative outcomes of a delayed due diligence:
- Sellers becoming frustrated as prolonged due diligence creates uncertainty, and strains the seller financially and emotionally
- Acquirers conveying hesitancy to do the deal through excessive information demands, eroding sellers’ trust in the process
- Seeing the deal collapse due to exposure to market fluctuations or to competition jumping in when timelines are extended beyond the exclusivity period
How to save time and money for your M&A deal
Here’s a simple hypothesis-based approach that can help shorten this period and lead to quicker decision-making.
Step 1: Make a short list of hypotheses
Together with the P&L owner (deal sponsor) and the functional leads, develop a short list of hypotheses that the deal team needs to believe in for the acquisition to be successful. This needs to be done before going deep into the data room. These could be either sources of value or risks to be mitigated.
For example:
- Analysis of operational data will confirm a projected 15% reduction in combined supply chain costs post-close
- Customer satisfaction survey data indicates an 80% retention rate post-acquisition, with key accounts expressing commitment
- Market trend analysis will show a 12% annual growth in demand for the acquired entity’s niche technology solutions over the last three years
- Regulatory compliance audit will identify zero instances of non-compliance with industry-specific regulations in the last five years
- Historical customer churn data will demonstrate an average customer retention rate of 85% even during periods of market volatility
These hypotheses can be sourced from the valuation model drivers, and from the acquirer’s business unit leadership team.
Step 2: Validate the hypotheses
Validate or invalidate the hypothesis through the diligence process, based on the data room and conversations with the management team.
The results will be “pass” for some areas and “fail” for others.
Step 3: Double check the hypotheses with your team
Regroup after the validation process to check whether
- The deal team has reflected the results in the valuation model and, if that is the case, how; and
- The deal sponsor and functional leads have either become comfortable with the findings or consider them to be deal-blockers
Step 4: Analyze the results
At this point, all the hypotheses would have been either confirmed or invalidated.
There will of course be additional takeaways, but if the hypotheses were built right, the most important takeaways will bubble up to the top of the list.
It’s now clearer whether to pass on the deal, or go back to the target with the right revised valuation and deal structure.
