As much as you wish it might be so, due diligence is really not an optional consideration. Have you ever made a decision based upon what you thought was a thorough understanding of all pertinent information only to find out after the fact that you didn’t know as much as you thought you did? It’s not much fun to find yourself on the wrong side of the information gap…Incorrect data, omissions, information that is biased or skewed, misrepresentations, misunderstandings, or any number of other scenarios that lead to the creation of information gaps can be very costly in today’s business environment. In today’s post, I’ll discuss the critical nature of due diligence…
Quality information enables good decision making. While at face value, this would appear to be a rational statement, the problem lies in the fact that it is also a relative statement…
Over the years, I’ve witnessed business people that make critical decisions based on nothing more than gut feel or instinct. I’ve observed others that rely on the use of detailed internal checklists and/or processes to validate their assessments, and I’ve known others who won’t make a critical decision unless they hire third-party professionals to conduct due diligence on their behalf. Regardless of your method (or lack thereof), managing information and decision making risk has never been more important than it is today.
With the constant pressure to compress transaction timeframes in an effort to remain competitive, many firms are actually doing less due diligence on larger transactions involving more potential risk…While this may sound ridiculous, the sad truth is that it is a scenario that is all too common. Hedge funds, venture capital, and private equity firms, asset managers, investment banks, or corporations involved in anything from early-stage investments to real estate transactions to mergers and acquisitions have intense pressure to get deals closed quickly in a market that has never been more complex to navigate.
While you by no means should ignore due diligence, you also cannot allow yourself to fall prey to being paralyzed by analysis paralysis. To balance the main topic of this post with the transactional realities present in today’s market you should also read a previous post entitled “Timing Is Everything.”
Let’s put aside the obvious reason for thorough due diligence (making a good deal), firms that don’t have rock-solid due diligence capabilities may find themselves in arbitration, litigation, or under the scrutiny of regulators as a result of poor decisions. Public companies dealing with Sarbanes-Oxley should be terrified of not crossing every “t” and dotting every “i”…
Bottom line…No amount of due diligence can protect you against flawed decisions or a bad deal, but if a thorough due diligence effort can manage or transfer risk in the majority of situations, it is well worth the time, effort, and cost to do it properly. If you short cut the process, you’ll likely find yourself being held accountable for that decision someday…
