Focussing attention at the far end is valid too.
In much the same way our conversations with Private Equity (PE) investors and target firms have prompted us to question the primary focus of Management Due Diligence solely on senior people, we have also concluded that it may well be argued that Management Due Diligence is just as valuable at the latter phase of the investment cycle, when thoughts are turning to preparing for exit.
Showing current status and enabling “then and now” value-added comparisons.
Whatever the planned next step (whether to offer for full or partial sale, attracting new investment, or some other plan), there will be a point at which the investor will want to present the business for examination.
In conducting Management Due Diligence or a “talent review” much later in the investing relationship, there are two primary outcomes.
One is to demonstrate the status of management capability in the business.
The second is to show the value-added to the business and the growth of those within it.
Arguably both would provide interesting additions to the pre-exit process and negotiations entailed in offering a business for sale, further investment or other exit plan.
Current Status
In terms of status, while the business looks commercially attractive and other parts of Due Diligence are sound, who wants to take on a business with senior management problems, poor morale, a worn-out low potential work force etc.
Equally, when preparing for exit, one ought to take any feasible opportunity available to demonstrate how good the proposition is.
Knowing about and addressing these seems like an obvious application of Management Due Diligence so as to act as a form of risk management or defence against uncomfortable negotiating points.
Taking a risk-based or forced-negotiation view of people both individually and collectively, introduces a different vocabulary and gets everyone thinking on different terms.
Notably when we say “risk-based” we mean the accepted modern comprehensive definition of “risk” to include the positives and not solely the negative threats.
We have explained in detail how we do this elsewhere.
In summary, it ranges from individual reviews of senior talent, through to the collective impact of teams and to the prevailing attitudes and culture.
“Then and now” value-added comparisons.
The issues are much the same when considering a form of Management Due Diligence as the basis for demonstrating how much value has been added across the period of investment. The methods are essentially the same.
Naturally, an ideal is where Management Due Diligence has been conducted early on since that then enables a “test, retest” situation.
Nevertheless, the main point to note however, is that we are able to do “then and now” comparisons even if the “then” parts may not be in the same form.
A missed opportunity.
The essence of this is simple. We are advocating using Management Due Diligence methods not just at the early stages alongside other Due Diligence activities but to consider them much later in the investment relationship.
It seems like a missed opportunity to use validated approaches, and all means at one’s disposal to ensure that the path to exit is as constructive as the proceeding period of ownership.
Management Due Diligence seems like as sensible way to ensure that the management and people issues are aligned with the desired exit outcome.
In summary
- The primary focus for Management Due Diligence is often mainly at the front end (ideally before often after) of the investment transaction.
- The lesser focus at the far end when embarking on preparation for exit, seems like a missing trick.
- Conducting a Management Due Diligence status check or “then and now” value-added review seems like an obvious opportunity to support the attractiveness of the business en route to exit.
About The Author
Dr. Steve Sloan is an acknowledged leadership expert and consultant who has over 20 years’ experience advising clients globally.
He can be contacted via email or by calling 07585 548420
