Money Left on the Table

by | Apr 26, 2021

Investors who perform only financial and operational due diligence are leaving money on the table.

It is standard for investors and companies to perform rigorous financial and operational due diligence when preparing to invest. They spend money to hire valuation experts, lawyers, and financial experts to gather data and help them decide exactly what a company or investment is worth. Yet, most deals fail to achieve the target ROI1.

 Traditional due diligence doesn’t fully consider the leadership and culture factors that are critical to organizational growth and success. A good “gut” feeling about a leadership team or using a personality assessment will not provide insights as to whether a leader has the capabilities and behaviors necessary to grow their company and achieve the investor’s strategic objectives. Further, cultural considerations, particularly in the case of M&A deals, require a greater level of evaluation. Two executive teams getting along does not necessarily mean that their organizations’ cultures will integrate seamlessly. If leadership and cultural considerations are left unaddressed until the post-transaction stage, costly problems can arise that undermine growth and slow integration. Investors who are looking to create lasting value and achieve their strategic objectives can go beyond the numbers and leverage leadership and culture due diligence to mitigate risk up front and improve financial outcomes.

 When you dig a little deeper into the numbers, many private equity and M&A deals go wrong when the leadership or culture at the newly acquired firm isn’t prepared or capable of driving the growth and implementing the strategy desired by the investor.

Rather than writing these failed deals off as par for the course, or spending massive amounts hiring consultants to try and fix the problems, investing in leadership and culture due diligence alongside other diligence activities allows investors to evaluate and begin to address potential leadership upfront, saving money, time, and costly turnover in the long run.

 Incorporating a leadership and culture assessment as part of your due diligence process helps ensure that you can identify risks, such as leaders who lack the vision, communication, execution capabilities to drive significant growth or mismatches between a strategy that focuses on innovation and culture that maintains the status quo. Once the risks are known, investors can either plan specific ways to mitigate these risks (employee retention plans, leadership coaching, culture initiatives, or operational changes) or reconsider the investment based on the data. Quantified insights on leadership and culture within a potential investment enhance and complement the financial and operational due diligence.2

 Leadership and culture issues derailing the financial returns of M&A and PE investments are well known, and there is a simple solution: better human capital focused due diligence. Savvy and strategic investors understand that making the small investment to perform leadership and culture due diligence up front and identifying the potential risks can save money in the long run and decrease the time until they see returns on their investment.

Katherine Butler-Dines specializes in project management, strategy design, and business development. With a passion for helping companies grow efficiently and effectively, Katherine focuses on helping people and businesses put into place the structures and processes to not simply adapt to change, but embrace it. She has previously supported quantitative and qualitative research projects on entrepreneurship, particularly about women entrepreneurs, across 11 different geographies.

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