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The Importance of Incorporating Value Creation Early in the Deal Lifecycle

Why do deals fail?

Well, human nature and outside factors can certainly play a role, but often the problem primarily lies in the execution of due diligence, though not the execution of data collection.

Due diligence, while it is getting better, has historically been focused on data collection and box checking (“find out these 15 things about taxes, find out these 20 things about HR, etc…”). However, what needs to happen is for practitioners and their governing source to take a step back and talk about value creation levers. 

What does building due diligence on value creation levers mean?

It begins with asking what you as a company bring to this transaction in terms of creating value that anyone else involved with the target is not able to do? The answer to this question is what you must then focus your due diligence around: gather the data needed to prove or disprove the value creation hypothesis you are suggesting. Then, when you get to making a decision about going forward with the deal, you are going to be making a robust decision that rests on the right data. Moreover, when it comes to preliminary deal evaluation, you will be operating from a more reliable point of view on what you can actually achieve in value creation, and, therefore, have confidence in what the deal pricing should look like. 

In summary:

More practitioners are learning the power of the pivot, but this shift needs to come much earlier in the deal making process so you can focus your diligence efforts around it. This practice will yield more successful deals due to empowered, focused, and informed decision-making, while also helping you abort bad deals earlier. Having a designated “black hat” wearer or executive skeptic is also a best practice of value creation — it pays to kill both bad deals and good deals that do not have tactical alignment with your inorganic growth strategy.

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