Martin Holzapfel: Strategic Due Diligence

Good strategic due diligence is an opportunity not only to capture the full potential of a business, but to identify unseen synergies, to provide a culture evaluation and to prepare for the integration even before the deal is finalized. Martin Holzapfel, a partner with Bain’s Corporate M&A practice and global product leader for Strategic Due Diligence, discusses the systematic approach executives need to take when doing due diligence.

Read the transcript below.

MARTIN HOLZAPFEL: Doing good strategic due diligence is a unique opportunity to capture the fundamental value of a business rather than doing a technical plus-minus 10% adjustment to someone else's business plan is an important generic evaluation model, because otherwise you might either overlook fundamental risks of the business or simply fall short with your bid, not capturing the fundamental value or the full potential of such a business.

On top of that, a good 60% of the experienced executives who are working with actually claim poor preparation over due diligence to be a major driver of disappointing deal outcomes later on. So the most experienced and successful acquirers take a very systematic approach on that.

You start from an independent, clearly articulated, and testable deal thesis that you ideally spell out early on as a part of your M&A strategy about the targets you want to achieve, so that you're well-focused and zoomed in once the heat of due diligence is on.

If such a due diligence does start, you then test those value drivers that you've spelled out in a very objective and factual manner. This typically would include a key link of the business to market drivers. These days in the late 2010s, this would typically include even a major recession scenario, either in the US or globally. It typically would sit on very broad, factual and robust customer feedback, which is an incredible weapon when it comes to negotiation with the seller about the state of the business.

And it would include competitive pressure and [the potential for digital disruption] in the industry. Don't underestimate especially how vulnerable those businesses are throughout ownership transitions.

In parallel and on top of the testing of the base value of the business, think about full potential. What would you really want to do with this business once you're able to operate it? And there's a ton of good reasons why even the well-crafted sales side business plans would not include the destination you would give to such a business, both standalone as well as based on scale and scope synergies while you're acquiring this business.

On top of valuation and business levels, start thinking integration, and specifically risks, cultural misfits, et cetera, early on, especially around the critical areas and the value drivers of the business. This is not only going to allow you to focus your own efforts and your people to mitigate those risks, but it's going to give you a much better educated, proactive, lively, and transparent discussion with the talent and the teams that you are acquiring, because they either will wait for or proactively ask you for their professional destiny. And the more clarity you provide, the more of the risk you can proactively address and not let them come up as an area of uncertainty.

So as a bottom line, good strategic due diligence is full potential strategic thinking in a nutshell. It either gives you insight into a cool and exciting adjacency or it helps you taking an independent, fresh look at your own core business. This takes time, this takes energy, and it requires preparation, but there's no excuse for not doing that early on and starting better prepared.