Russia’s invasion of Ukraine, rising interest rates and soaring inflation meant that 2022 was characterised by crises. Unfortunately, 2023 will likely hold similar challenges that make forensically-accurate asset scrutiny critical. The general consensus is that now is not the time to take unnecessary risks, hence the need for robust and reliable due diligence that covers all areas of possible exposure.
Over the past few months, we’ve explored the importance of due diligence for companies and investors, including technology and IT, vendor and commercial due diligence. Now, we’ll explore management due diligence to demonstrate why the process has renewed importance in the current economic climate.
As economic conditions worsen, investors are keen to ensure their investments will likely yield sufficient returns. As a result, many investors are implementing in-depth due diligence processes to scrutinise all areas of target assets, including, to a growing extent, management. Misaligned skills, experience or attitudes present significant risks that investors are keen to uncover early in the M&A process so that they can assess the impact on the transaction itself and any subsequent value creation plans. One risk that requires more attention in 2023 is attitudinal gaps between an asset’s key decision-makers and potential investors.
Uncovering Attitudinal Gaps
Conducting management due diligence on a target asset allows investors to determine whether there are attitudinal misalignments in the senior management team as it stands or with the plan set out for future growth. A management team with what an investor sees as a potentially limiting or even damaging attitude presents a major red flag.
Potential attitudinal gaps between management and potential investors come in various forms. For example, they may be strategic, as the management team may desire to lead the organisation differently than the potential investors. They can also be related to how the individual treats the teams they manage. For example, the management due diligence process may uncover allegations of mistreatment or discrimination—these potentially deal-breaking red flags would not be revealed during the traditional due diligence process but can be especially damaging with the heightened focus on companies’ ESG credentials further down the line.
Attitudes to technology
A commonly observed attitudinal gap relates to technology. A report by the UK Government found that several attitudinal factors either drive or impede the adoption of technology in UK businesses—one of the most influential attitudinal factors is the innovation mindset. Innovation mindset is the degree to which a company is proactive or resistant to change. The report identified several business typologies relating to change, including defiant resisters, reluctant innovators, cutting-edge industry innovators and growth-hungry startups. The first two typologies are usually red flags for investors, while the second two are desirable.
Many organisations realise the almost limitless potential of technology. For example, 72 per cent of CEOs say they are implementing an aggressive digital investment strategy. Cutting-edge industry innovators and growth-hungry start-ups are the most likely organisations to have this attitude. In sharp contrast, 40 per cent of CEOs have paused or reduced their strategies, meaning these organisations are likely classed as defiant resisters or reluctant innovators.
In some organisations, management teams may possess ‘old school’ views that mean there is a fundamental misalignment between them and the potential investor. This group is classed as ‘defiant resisters’—individuals who are defensive about their current strategies and resistant to innovation. For many investors, management teams with a willingness to make the most of the latest technological advancements are no longer a ‘nice-to-have’ but a necessity.
The role of technology due diligence
To ensure that an asset will be a technical asset to a portfolio, the investor may also decide to conduct technology due diligence as well as management due diligence. Attitudinal gaps relating to technology may be uncovered during the technology due diligence process or have their impact more fully outlined. During the management interview stage, the diligence provider will ask management teams about the firm’s technical capabilities, processes and plans to gain insight into its inner technical workings and ability to evolve.
The onefourzero technology due diligence process involves a red flags rating system, where categories such as website and infrastructure, risk management and compliance and IT security are ranked. All technical aspects of a firm are ultimately driven by its management team. As a result, failures relating to technology may point to a damaging attitudinal gap that must be fixed if the business is to prioritise innovation.
In 2023, investors should prioritise in-depth scrutiny of the assets they wish to acquire to reduce risk. Conducting in-depth due diligence that delves deeply into all aspects of a target asset is now non-negotiable. Commercial, technology and management due diligence have a vital role to play in ensuring that investors and brands make informed acquisition decisions in today’s tumultuous economic climate.
Onefourzero is an award-winning consulting firm delivering M&A diligence reports, commercial performance monitoring and value creation services for investors and brands. Whether you’re seeking a commercial diligence report, a market map, or you need to track your company’s performance against competitors using reliable and robust data sources, we can help. Contact us today so we can discuss your requirements in more detail.