As I’ve written about in a previous post, strategic due diligence is quite different from financial due diligence. While the latter focuses on finding answers to questions you already have (your “known unknowns”), strategic due diligence aims to identify the blind spots which you are not aware of (your “unknown unknowns”) prior to investing.
In a sense, strategic due diligence is about rapidly discovering the right questions to ask in a specific business situation. It is truly an investigative challenge. When performing strategic due diligence, you are not assembling a puzzle whose pieces are clearly and exhaustively contained in a defined box. You’re looking for clues in a wide-open and ambiguous environment where the signal-to-noise ratio is quite low. To further increase the challenge, this investigation has to be performed under two significant constraints, those of intense time pressure and massive information asymmetry between buyer and seller.
I’ve often heard that due diligence is about “connecting the dots”. I don’t believe that this adequately reflects the challenges of performing a high-quality and truly actionable strategic due-diligence. Such a due diligence requires a prior step: before connecting the dots, you need to uncover and expose multiple hidden dots that weren’t in the data provided by the seller and/or his broker. And you need to figure out which of these dots are relevant. And you need to rank them in order of importance and decide which ones you will focus on. Only then can you start to connect the dots and figure out what the deal narrative really looks like. In my opinion, a strategic due diligence should definitely lead to the discovery of at least two or three significant questions which were not on your radar when initially walking into the data room with your initial thesis. Otherwise, you’d be justified in feeling that you’ve probably missed something important regarding the deal you’re analysing.