An Entrepreneur’s Lesson: Ditch the Data Room

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I don’t think I remember anything pleasant growing up and thinking about Homework.  Or Medicine.  Or Doctor Visits.

The entrepreneurial equivalent of Homework is a fancy term called “Due Diligence” (DD).  Think of it as homework on steroids, where $’s, jobs and cultures are all on the line when a business acquisition is taken place.  It typically happens after signing a Letter of Intent (LOI) to purchase the business, for a defined period of time, say 90 days.  

Chances are, if this business is bigger than “Mom & Pop” (say greater than a couple million in revenue), you may have access to a “Data Room.”  The Data Room should have plenty of info to do your homework on the business:

  • Financial statements, Tax records
  • Legal documentation
  • Marketing/Sales Collateral
  • Employee records, policies, grievances
  • Hard assets, including property, equipment, building info
  • Management reports:  Sales trends, costing info, customer info, suppliers, etc.

Exhaust the data room, know the info cold and keep your notebook of key questions and insights.  More importantly, give other trusted advisors access to it, you can’t catch everything in there.  Something will be viewed through a different lens, and you need that additional insight.

Then the most important lesson of them all?

Ditch the Data Room.  Quickly.  

A former colleague I had the privilege of working with had a favorite saying:

If you want to know how the lion lives, don't go to the zoo, go to the jungle.

The jungle is where the value is currently created in a business.  

It’s also the springboard, or quick sand for future value creation.

It is nearly impossible to understand a business by populating a data room with “Culture.”  By definition, culture is hard to put your finger on, but it means everything.

A toxic culture will swallow any value creation plan.  Develop a strategy early for unwinding the culture.  A few pieces I’ve written on Culture.  

The biggest challenge with assessing the culture?  It can’t happen by a simple “walk through” the operation.  You need to be imbedded, as if you worked there, so find a way to “get on the inside” as quick as possible.  

I would build into your Letter of Intent that you need at least 4 weeks inside access to the business as part of your DD, as the last and final step, and as a springboard to hit the ground running after close.  

Most owners will be hesitant here.  Stand firm anyway.  If you need to make concessions, concede the post time transition support.  If you can’t gain formal inside access as part of DD for at least a week, what does THAT say about what you are buying?  

It IS customary to have owner transition support for extended periods of time AFTER close.  The problem with this is obvious:

  1. The money is already spent.  Your investment thesis will likely change AFTER you get in the jungle.  Surprises alter ROI.
  2. What perspective will existing ownership lend AFTER the close?  THEIR perspective.  What THEY know, has already produced what’s already in the data room.

What matters is how NEW leadership will impact (good, bad) an existing culture.  The unknown for the entrepreneur is not their own leadership style, it’s the company and culture they will be inheriting.  Existing employees hold the keys to unlocking those unknowns.

On the “inside” means exactly that.  You are essentially parked inside the business, all day, full working hours.  It’s not complicated, but you need to do some basics…..

  • Invest in personal rapport first.  Get to know THEM, and start to establish trust.
  • Find the opinion leaders, connectors and people that know how the place runs, where the skeletons/challenges may be, how the morale meter registers.
  • Make sure you are listening 2x’s more than your talking.
  • Customer meetings and trade shows are the best way to go to get a feel for the “whys” behind the revenue line, so take advantage of all of those opportunities.

In short, you’re trying to find the “WHYs” behind the WHATs you learned from the data room.  Then, you’re developing your plan for the future.  Part of that plan is confronting the realities of the culture, and eliminating surprises. 

Business is fraught with opportunities to get caught up in Paralysis by Analysis.  If you’re going to be paralyzed by analysis, make sure you’re sitting in the jungle, NOT the data room.

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Comments

  1. Customer meetings and trade shows are the best way to go to get a feel for the “whys” behind the revenue line, so take advantage of all of those opportunities.

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