Thread by @tsludwig

A thread on due diligence.

An important step in buying a business is the conducting of due diligence. When it works well, the buyer takes control with a solid grasp of the operations on day 1 and few post-close surprises (there are always some)...

…when the process is weak, at best the new ownership faces an uphill struggle back to a decent investment and, at worst, the company can go under, face other unpleasant and stressful events.

This list could be expanded, but here are five common causes of due diligence failures:

1) Being a victim of confirmation bias and explaining away negative findings
2) Neglecting to spend money on the right external advisors (tech, regulatory, etc.)
3) Not digging deep enough on customers – pipeline accuracy, satisfaction of existing customers, etc.

4) Failing to evaluate the current leadership’s behavior. Companies often resemble their owner's style/values. “A fish rots from the head down”
5) Not managing time well & focusing on trivial aspects of a company. Prioritize around areas that will validate the investment thesis

It is better to spend a little time and money during diligence than to miss something and close a deal with critical issues, though human behavior often makes this easier in theory than in practice. Don't fall so in love with a deal or become so committed that you can't walk away