Being a big fan of analogies, I like to compare financial/accounting due diligence to a jigsaw puzzle and strategic due diligence to a crime scene investigation.
In a jigsaw puzzle, the problem is well defined from the beginning. You have a box full of pieces to assemble right in front of you (the dataroom). The entire task is contained within this one clearly-defined jigsaw box. You simply have to
- go through the motions of auditing the data provided
- build a financial model which reflects the behavior and interrelations of revenues/costs/expenses/capital expenditures
- extrapolate the past and feed the financial model with some best case/worst case scenarios.
A crime scene investigation is different. To solve the mystery at hand, you start with little or no guidance. The problem-solving task is not clearly defined. (The world is your dataroom!) By closely observing the crime scene, you can pick up certain pieces of information that may (or may not) be clues to the mystery. There are multiple red herrings along the way. Once you feel you’ve gathered enough clues and observations, and once you’ve proactively linked your different observations and your data points, you can now build your forecast (thesis) of where the criminal will strike next. And you can start validating your thesis. That’s the only way you can hope to catch your criminal…
The point is that strategic due diligence is a much more open-ended exercise. It requires assumption-making and thesis-building. Whereas financial and accounting due diligence present you with a clear cut set of information to analyze, strategic due diligence presents you with the unique challenge of correctly framing the problem before you even attempt to solve it. It requires creativity. It requires decision-making, as you are time-constrained and cannot follow every possible lead. You have to prioritize the leads to follow, by using your intuition (acumen) and probabilistic thinking. Commercial due diligence is the part of the diligence process that requires you to make an educated and substantiated guess about the future. It requires a different kind of reasoning and a different kind of questioning.