The operational due diligence process is about more than gathering intelligence. In mergers and acquisitions, it’s the first stage in a two-way courting process between a seller and potential buyer.

In Mergers and Acquisitions, Buyers Have to Put Their Best Foot Forward Too

It happened again during an operational due diligence visit last month. After a day spent walking the factory floor and reviewing performance reports, on the way to dinner the CEO asked some pointed questions about the private equity firm we were working for. 

  • What kind of firm are they?
  • What happens to the companies they acquire?
  • What do the partners really care about? 

The due diligence process will always be about gathering intelligence for the buyer. At the same time, as such questions highlight, it’s a critical element of a two-way courting process that’s often overlooked.

This is why, before an operational audit, we ask our private equity clients what approach they would like us to take. How tough or nice should we be? Inevitably, these days the answer is that we need to be diligent yet respectful. We will still ask for the reports and data we need, but that’s easy enough to do nicely. There’s no reason for us to come across as heavy-handed or overbearing. After all, the approach we take will help sell the PE firm to the targeted company. 

These days, from the initial bids to final offers, any reasonably profitable business has plenty of suitors. And the offers all tend to fall within an acceptable range. When the purchase is finalized the owners will make a significant amount of money. But the winner in mergers and acquisitions isn’t necessarily buyer who offers the highest price. It’s often the firm that the current owners or management team feel is the best fit, the one which will best support the company’s future success and growth.

This even happens when one private equity firm sells to another. There are positive relationships and reputations that people want to maintain, which will drive future deals.

The Art of Diplomacy

Answering the current business leaders’ questions about their suitors requires some tact of course. We never share anything that could undermine a potential acquisition. When appropriate we will share our knowledge about what the firm has done in the past, what we know of the culture, their improvement priorities and the investments they’ve made to help their holdings succeed and grow. 

Whether these casual conversations occur with the CEO or at some other level, they always get repeated. It’s like trying to make a good first impression in a personal relationship because a bad impression is almost impossible to reverse or overcome. Partnering with a reputable and diplomatic operations advisor during the due diligence process will ensure that a potential deal starts off on the right foot.