Value Gen Stimulant in Commercial Diligence Processes

Today’s GRAPH Papers® article is short and simple. A quick process, best-practice on the value gen. front of commercial diligence that could prove to be a useful commitment to make for your projects. Most diligence assignments start with discussion, and some amount of the diligence agenda, focused on testing the commercial value generation ideas that exist. And among investment teams, we know that the internal discussion is often ongoing throughout the process. But, surprisingly, the discussion on value gen. ideas with outside diligence advisors can be all too limited to two distinct points: the front-end of the project and the back-end (i.e., in the final read-out) – both of which are meetings that already have a lot of other topics packed in. An awful lot of the ideas circulating pull from the thoughts of the bankers and existing management teams – some of which may be sound, but all of which are equally in the hands of your competitors (i.e., the other bidders).

Part of the problem (of not giving the topic sufficient air time to generate original thinking and pressure testing) is the result of tight process timelines, but we know that some of this is the result of a client team leader not introducing an intervention that can radically drive a better result (and carries no cost).

Recommendation: Pick the mid-point in the timeline, even in quick-turn diligence projects, and schedule a collaborative workshop with your third-party diligence provider – separate from the interim read out – that is dedicated to value generation development ideas. Push to make the meeting slightly longer than shorter and bring in the best minds.

Ideally hold this a few days after the interim and ask all participants (client team and consulting team) to come to the table with:

  1. New ideas for commercial value gen - with the case study references;
  2. Thoughts on how to best test these new (or enhanced) ideas in the remaining period of diligence; and
  3. Thoughts on how the idea could be incorporated into the 100-day plan.

In the meeting, get creative and build on the ideas that surfaced. Resist focusing on the reasons why something won’t work, and instead close out the discussion with clarity on what specifically should be tested in the remaining diligence run to test the ideas. Make sure the key decision makers on the investment team are aligned with the method, targets and the evidence required – in order to leave the exercise with a comfortable measure of the extent to which the results can be considered in any business plan (or any business planning process). Obviously, the evidence base will need to be commensurate with any reliance on the idea in the acquisition bid, but regardless of whether the idea is factored into the valuation, this simple process step can go a very long way to getting more out of the diligence dollar and establishing a valid and impactful growth plan, post-closing.

If your diligence runs in multiple phases, repeat this process step suggestion within each phase of work – and don’t put the idea aside if the prior phase had little yield. Results will typically become greater throughout the course of examining and developing the opportunity.

Takeaway: Don’t assume that the investigator will automatically bring this to the exercise without a mandate and without the suggestion (or insistence) for this process step. Make sure that every dollar is spent not just validating the resilience of business but on examining how to best grow valuation while the asset is in your hands. And make it a collaborative effort – it will drive buy-in, alignment (on the conclusions) and enthusiasm for this valuable mandate that should exist in every diligence exercise – distinctly developing the greater value generation opportunities.

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