A Long-Term Posture on Diligence
There’s a persistent idea in deal-making, especially around the due diligence process, that “time kills all deals.” People are in a hurry, and they’re trying to ensure a deal doesn’t stagnate, wither, and die on the vine. And there’s real value to ensuring that a closing happens in a reasonable amount of time.
But the inverse is also true: If you “rush to the altar” on a deal and with people you haven’t fully vetted, built relationships with, and share trust between and among, it’s going to come back to bite you.
Our view? When you’re laying the groundwork for a 27-year partnership, diligence should take as long as it takes. What counts as “appropriate” is subjective, but can either set the process up to fail or to build trust.
When partnering for the long haul, angling to renegotiate the deal in diligence is an unsustainable strategy. In some transactions, the idea that, for a seller, “You’ll never get more for your company than what’s in the letter of intent – from that moment forward it’s going to be an exercise in trying to beat that number down” holds. Is that more true in financial acquisitions that aren’t geared toward building a long-term operational partnership? Yes. When you’re buying something and your sole concern is about what the financial return looks like in a 3- to 7-year horizon, dollars dictate everything.
But when you stretch that time horizon for decades, not only do the incentives change, but the scale of problems and what it takes to come to a solution change too. When a house is sold, a seller may hope a leak goes unnoticed and the buyer may want to knock down the price for an HVAC unit near death. Long-term relationships aren’t built that way. If you’re trying to optimize for a generational partnership, well, you’ve got to live together after the deal closes.
In practice, that means that if you’re looking at “problems” in a business from the 30-year mindset, things that might have seemed insurmountable are instead worth the investment to get it right. And you have the latitude to be a little wrong. You’re not optimizing for short-term returns on a one-time bite at the apple. You’re optimizing for long-term stability, durability, growth, and partnership.
The upshot of that is that diligence can be the first step towards building a meaningful long-term relationship. By the time we get to the point where we’re ready to put in the time, effort, and resources required for this type of diligence, we don’t want there to be a “gotcha.” (Of course, if new information emerges – intentionally withheld or not – that materially impacts the situation, there’s another conversation to be had.) We have a shared goal of closing, and we want to surface issues to work collaboratively to find solutions, understand and mitigate risk, and get across the finish line.
Except that it’s not a finish line. Because, with a long-term partnership, closing isn’t an end step, it’s just the next step in building trust and creating fruitful relationships. And, it’s a key reason why diligence can’t be a one-way street and, in our process, isn’t simply about analyzing the documents a seller submits or writes on a sheet of paper. It’s a conversation, and the behaviors and modes of communicating and process of doing diligence tell you just as much about the future of the partnership as the answers themselves.
When people go through tough experiences together (think boot camp), they are more likely to come out the other side bonded together by strong relationships and high levels of trust. While we’re not putting due diligence in quite the same bucket as military training programs, it’s still not an easy or fun experience. And, if you’re a buyer that outsources due diligence or are optimizing for quick profitability and sale, you may approach the process with a “just the facts, ma’am” mentality – which doesn’t leave a lot of room for bonding or an incentive to examine things that might be relevant long-term.
But if you go into the process with one of your goals being to build the trust and relationships required to promote sustainability and flourishing of the business post-close, diligence isn’t just document review. You’re looking for collaborative opportunities to work together and share resources. Or open and transparent communication during the due diligence process and beyond. Or practice in solving problems (say, improving insurance coverage or restructuring contracts) together. Or the risk mitigation and problem-solving to tackle the inevitable and unexpected challenges that crop up in long-term operating partnerships.