Organizational due diligence as a value creation lever

Information asymmetry in dealmaking has favoured incumbent management teams over investors, especially with culture and leadership practices. Managers may know where these skeletons are buried – investors need to find them.

Commercial, financial and legal DD are must-haves. Increasingly, ESG, IT and management due diligence have been added. But deal teams are frustrated by the results of management DD in particular.

Personality and psychometric assessment results are too far removed from business realities and the value creation plan to deliver actionable insights. And conducting management assessments does not deliver better deal outcomes, according to an empirical study by a well-respected UK fund.

Risk-savvy investors are therefore searching for alternatives to better assess the ability of the target company’s organization, to execute the value creation plan.

They are increasingly turning to broader organizational due diligence (Org DD) to deliver more pragmatic and business-relevant insights on organizational structures, leadership processes and competencies. Looking at these more pragmatic enablers of investment success cuts through the subjectivity of traditional psychology-based management assessments. It also delivers a more objective view of management’s capabilities. It’s better to judge a manager by the quality of structures and processes they established in their teams, rather than observe responses to hypothetical stress questions in a lab.

Org DD has the additional benefit that it is less threatening to managers and enjoys higher acceptance with sell-sides. It is easier and less risky for the deal to ask for brief access to management for business process interviews, rather than for psychometric testing. Humatica’s Org DD clients find that management teams appreciate the genuine interest in really understanding how the business works.

A lot of valuable information on organizational readiness is also gathered from the VDR and other sources, including advisers and non-exec directors. Org charts and role descriptions are simple things to check. And compensation structures, talent management processes, board minutes and employee survey data are commonly available and useful. Triangulating internal sources with LinkedIn and external data rounds out the picture on likely organizational risks to executing the value creation plan.

Humatica has perfected organizational due diligence during the last 20 years with a proven ‘Accelerate’ structured service. In just two weeks, it delivers unprecedented fact-based insights on diverse organizational risks – a key reason for Accelerate quickly becoming an investment committee must-have.

This article was originally posted as Humatica Corner in Real Deals Magazine.