How to Select a Due Diligence Consultant
Some of the benefits of using outsourced due diligence consultants include access to experience, expertise and objectivity. Good due diligence companies can help you make better business decisions, protect you from liability, and increase your transaction success rate. But how should you go about selecting a due diligence firm that does the job for you?
First Things First
Before you get started, take some time and define the role of due diligence within your organization and what you hope to accomplish. Make a list of specific objectives you'd like to achieve and how you envision the relationship with your consultant. That will help to drive the search for a trusted due diligence consultant.
Should You Work With a Big Organization or a Smaller Boutique?
Does size make a difference?
Here's our take on it. Size doesn't matter. Performance matters. Ability matters. Knowledge of specific industries and technologies matters. Connections and relationships matter. Experience matters. Dedication, devotion and passion matter.
In short, you want to engage a consultant that gets the job done at a reasonable price and adds value beyond your expectations.
Key Concepts to Keep in Mind
When selecting a due diligence consultant, keep the following things in mind:
- Look for Multi-Functional Expertise. Here's a recipe for disaster. Use one firm for technical due diligence, another for logistics due diligence, and yet another for financial due diligence. By parceling out the work, you'll limit the "world view" of your consultants to a very narrow field of vision and greatly limit their ability to get the big picture and identify the most important issues. Instead, pick a firm that has multiple practice areas and is deeply experienced in each one.
- Consider an End-to-End Provider. Post-transaction integration planning starts during due diligence. Given the intimate knowledge that your due diligence team gains from its work, it's a no-brainer to involve them in post-transaction integration planning, which is critical for success. Accordingly, pick a firm that not only does due diligence consulting but also can form, implement and accelerate a comprehensive post-transaction integration plan that will ensure your business goals are achieved.
- Be Wary of Conflicts of Interest. Certain firms may have a conflict of interest and you should be wary of this. An accounting firm that performs due diligence consulting work, for example, may want a transaction to proceed because they will get auditing work if it does. Pick a firm that is completely, totally and unequivocally objective.
- Avoid "Casual" Due Diligence Consultants. Some firms may profess to do due diligence consulting but it isn't something they've dedicated their professional lives to mastering. For example, a law firm may review contracts for you but may not have the specific industry or business knowledge to properly identify critical due diligence issues. A systems integration firm or research organization may opportunistically announce they have a due diligence practice to create a new revenue stream without ever really understanding what it takes to do due diligence well. Pick a firm that is dedicated to achieve operational excellence in the area of due diligence.
- Secure Long-Term Relationships With Your Consultant. The ultimate consulting relationship is a highly productive one, in which there are no inefficient communications between you and your consultant and there is an implicit understanding of and trust in each other. Hence, when you do find a good consultant, nurture that relationship for the long term so that your due diligence efforts are constantly excellent.
Finding the Right Firm
First, go back to your specific objectives for due diligence. That will translate directly into requirements for the consultant. Understanding your needs will help you to find the right firm.
Find the best due diligence consulting firm by thinking about others in your industry who you admire. Who has a reputation for doing phenomenal transactions? Find out who they use for due diligence. Ask your friends and business colleagues whom they think highly of.
Preparing for the Meetings
Arrange for meetings with the due diligence consulting firms. Share your objectives with them before you meet with them. Then see how well they tailor their presentation to you. The best firms are always thinking about you, not about themselves. If they come in and generically toot their horns about themselves but never give any sign that they've researched your business and your transaction, with an eye to meeting your objectives, that's a very bad sign.
If you are evaluating multiple consulting firms at the same time, inform them of their competition. They often will give you some insights on their competition. Take those insights with a grain of salt, and give high marks to those who take the high road and don't disparage their competition.
Some other words of wisdom on soliciting firm presentations include:
- Provide the firms with relevant background materials. If necessary, have the firms sign a non-disclosure agreement.
- Be sure to schedule the presentations within as short a timeframe as possible so you can compare and contrast them better.
- Let the firms know who the decision-makers are within your organization and be sure they attend all presentations.
How Can You Tell Who Will Perform Well For You?
Getting a sense for who will deliver the goods isn't rocket science. After you've met with the consulting firm, you get a sense for their breadth of practice areas, abilities, service levels, and professionalism.
In general, you want smart people working for you. If they don't think strategically and impress you with their expert-level understanding of your business and your industry, cross them off the list. The good ones will raise issues or ideas that you haven't even thought of yet.
Beyond that basic intelligence criteria, look for people with passion, who work around the clock, and who can communicate well.
How Formal Should the Evaluation Be?
This is a matter of personal preference. You may want to formally evaluate and score the consultants against a checklist or, if time is of the essence (which it usually is), you may want to go with your gut after thinking through a few key questions. Do their people seem to be of high quality? Is there a good cultural fit between the two organizations? Do they impress you? Have they done good work for other clients? Do they seem to have the right number of resources available to service you well?
Making the Decision
Talk it through and make a decision.
Avoid analysis paralysis. The longer you don't have a due diligence consulting firm up and running, the more you risk missing out on discovering important information that could affect whether you pursue the transaction or influence negotiations. In a perfect world, when a new transaction materializes, you have the relationship in place already and start-up lead times are close to zero.
Getting the most out of your due diligence consultant often hinges on the relationship you formally craft in the agreement.
It's tempting to do a one-off agreement. But the record indicates that you'll get best results with a longer-term contract. That's because the due diligence firm knows you'll be with them for a while and, frankly, that means a lot to them. They'll invest more resources and more effort if it's a long-term marriage rather than a short-term blind date. They'll assign their best people to your account on a dedicated basis.
Here's what we recommend. Commit to a certain number of consulting hours over the course of a year-long contract. Make sure that you get a better rate for having committed to giving the company some guaranteed work.
Follow the approach outlined above and you'll find a great due diligence consultant. You'll find it's worth the effort as you'll soon find good transactions more easily, avoid problem deals, craft better deals, conduct better post-transaction planning, and see a higher success rate that will ultimately translate into fewer sleepless nights for you and increased ROI for your key stakeholders.