Three critical questions rarely addressed in the diligence process

Having been on been on both sides of the fence through multiple due diligence processes (i.e. both a buyer and a seller), I can state with confidence that more often than not, far too much time is allocated to redundant financial analyses and far too little time is dedicated to getting answers to a handful of questions that ultimately define the success or failure of the investment and/or acquisition. The reality is that 95% of what needs to be known about a company's current financial capacity is uncovered within the opening forays of the diligence process, regardless of whether that diligence was done by an individual investor or a small army of analysts employed by a private equity firm.

This is not to say that capable financial analysis is not a fundamental component of an effective evaluation because it definitively is. An investment opportunity that cannot at the very least illustrate a healthy return on paper need not be considered any further. I would suggest, however, that if more time and resources were focused on the "not-so-obvious" factors influencing a company's future performance and capacity, there would be a significant increase in successful corporate investments. While there are a number of these not-so-obvious elements to consider, our experience has been that the following three questions usually solidify a prospective company in the hit or miss category:

1. What is the sustainability of the opportunity pipeline? - Most company's can paint a pretty picture that is represented by a snapshot in time. The true measure of a company's medium and long-term capacity will be uncovered once you have assessed its ability to generate and replicate an opportunity pipeline that will generate the type of annuity that aligns with your valuation.
2. How capable are the critical members of the management team? - While biographies will provide you with an elementary history of the individuals running the company, nothing can or should supplant comprehensive interviews that will allow you to form your own assessment of whether or not the existing team is capable of delivering the results on which you are depending.
3. What role, if any, do external parties play in defining the company's direction? - A Board of Directors, a Board of Advisors or a significant shareholder can all exert tremendous influence on a company's management team. It is imperative that you gain some reasonable insight as to the likelihood that a third party may alter the strategic direction of your new investment.

Interest will often be piqued when a company's financials align with your investment metrics. However, positive answers to these questions should provide you with the confidence that your investment will actually deliver on these metrics weeks and months after the diligence process is complete.

The need for a new era of "time management"

The phrase "time management" draws slightly more than 9 million hits on Google. By today's standards, that is surprisingly low for what in the late 80's/early 90's was one of THE catch phrases for personal and professional development. So what happened? It's not like the pace of life has slowed at all. In fact, by most people's account our daily responsibilities have increased by a factor of ten over the past twenty years.

One popular theory is that people have become significantly better at multitasking over the years (BTW, the term "multitasking", not long ago unrecognized by Webster's, now gets more than 17.5 million Google hits on its own). Personally, I think this theory is incredibly inaccurate Yes, there are indeed a handful of people who have been blessed with the ability to capably complete three or four things at once but my professional experience is that the huge majority of us do not possess anything resembling this capability. What makes matters worse is that with all the options, activities and "must-dos" that confront us in today's world, everyone is forced to assume the role of multitasker on a daily basis. Perhaps worst of all, a large number of us (i.e. most) have convinced ourselves that we have become very effective "time managers".

My professional prediction is that time management consulting is going to have a massive rebirth over the coming months, particluarly as people rediscover that time management is not actually another "must-do" activity to add to their lists but rather is a philosophy that should act as the framework from which all other decisions are made. While we wait for the avalanche of new time management gurus to populate the commercial landscape, may we offer the following advice:

1. Be careful what you ask for... - The "social media" movement has created the temptation to connect and reconnect with everything and everyone and to be sure is one of the most time consuming activities you or your company could ever engage in. Before you engage with the masses, be sure you that you understand what is involved, what benefits you or your company derive from participating and most importantly, what activities you are abandoning in order to make room for your new priority.

2. "Map" out your time commitments... - Whether you use one of the many mind map software applications that are commercially available or a simple piece of paper, there is no better exercise to go through than that of creating a visual representation of everything that places demands on your time. Ironically, most people will avoid doing this for fear of the decisions they will have to make as a result of accepting the fact that there are only so many hours in a day and thus we cannot do it all.

3. Simply learn to say "no"... - This is one of the most oft-used time management cliches in corporate history but it is also the concept that is ignored more often than all others combined. Until you are prepared to accept the fact that not every one of your scenarios "...is different because...", you will have limited to no ability to gain control of your workload and in turn sustain the work-life balance that is important to you, your family and everyone else that is a part of your life's equation.

When does it make sense to hire a consultant?

Other than "what does your company do?", the most common question that I am asked with regard to our practice is "when do people hire you?". While there are certainly a plethora of reasons why businesses engage professional consultants, it has been my experience that companies are primarily looking for one of three things when they approach our organization:

1. Specific expertise that is only required on an ad hoc basis - Whether it is a need for a strategic presentation (i.e. investors, etc.), an operational review (i.e. efficiency measurements, etc.) or professional facilitation (i.e. executive meetings, etc.), seasoned business consultants can provide world-class solutions on relatively short notice.
2. Strategic resources that can backfill a role in transition - Regardless of whether the leadership is required to develop the skills of internal resources (i.e. up-and-coming executives, etc.) or required as a stopgap while the company searches for a new candidate to fill an executive position, senior consultants can buy you some much-needed time.
3. Tactical capabilities to assist in flattening the demand curve - There are major fluctuations in supply and demand for every business and both the highs (creating a scarcity of resources) and the lows (resulting in hiring freezes) create major obstacles to generating relatively stable financial results. Consultants are resources that align well with variable demand.

In a perfect world, companies would be able to attract and hire full-time employees to fulfill each and every one of their business requirements as they arose. In the real world where uncertainty and Murphy's Law reign supreme, the need for capable business consultants to augment your team has never been so acute.

To invest or not to invest, that is today's question

Indeed the raging debate over the past eight or nine months for nearly every commercial entity across the globe has been centered around where and how deep to make financial cuts in order to survive the current economic downturn. However, one could (and possibly should) argue that perhaps the better questions to be pondering are how and where to make strategic investments.

Having led both private and public companies, trust me when I say that I do fully understand the complexities involved here. A decline in the demand for your products or services will definitively result in a drop in revenues and inevitably bring increasing pressure from the external entities that influence your organization; your investors, your customers, your Board of Directors, etc.. This pressure can be all-encompassing and will almost assuredly involve frequent (i.e. daily) assessments of your personal performance and career standing.

The decision to do anything other than to divest along with 95% of today's business community is both difficult and complex, but I personally believe that the advantages to overcoming this pressure and investing forward far outweigh the burden of the pressures that we are ultimately paid to absorb. Among other things, making strategic investments in tough economic times allows for the following:

1. Your company can acquire relevant resources and materials at market prices that are at unprecedented lows.
2. Your business will be positioned perfectly for the inevitable economic rebound that other businesses will constantly be one step behind.
3. Your organization will have the satisfaction of knowing that it is not contributing to the vicious cycle of divestment that will undoubtedly prolong the current economic downturn.

As for the second guessing that always accompanies a journey down a road less traveled, be sure to document and communicate the logic and projected returns associated with your investment strategy. Keep in mind that most people inherently want to invest in the future but in economic times like these, they will require a little more convincing if they are to break from the general tendency to retract and retrench when the going gets tough.

Related readings:

http://en.wikipedia.org/wiki/Virtuous_circle_and_vicious_circle ("vicious circle" definition/reference)

http://www.financialpost.com/story.html?id=1311004 (investment in technology saves time, increases productivity)

http://www.americanprogress.org/issues/2008/12/productivity_report.html (corporate investment fuels growth)