Management due diligence

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Management due diligence is the process of appraising a company's senior management team(s) with the intention of evaluating each individual's effectiveness regarding an organization's strategic objectives.[1]

Assessing a company's management team(s) is seen crucial when closing business deals, since it could be the key to assure long-term success of a new established company or its failure. In addition, this will allow the organisation to understand by which means will the teams be performing their roles, in context with the company's future business plan. All this will clarify the structure of the organisation's work-force.[2][3] The management Due Diligence process can be identified as an informative tool for external stakeholders, and can also be referred to as Management Assessment as it addresses the team’s dynamics and highlight the risks.[4]

Management assessment[edit]

In management assessments, the focus is usually on assessing the leadership skills and characteristics present in the organisation's managers.

Characteristics such as the ability to adjust with the changing environment,[5] In addition to the ability of the manager to communicate effectively with other individuals. These characteristics are considered essential key points when spotting a great leader. After all, if organisations have knowledgeable leaders the percentage of losses decrease,due to the presence of effective decisions.[3]

A true leader takes into consideration all present factors before going on with a strategic decision, such as taking into consideration the possible effects on employees and customers. Not only this, but allowing them to engage in the decision making process in order build better relationships with them.[6]

Transactions requiring management due diligence[edit]

Usually the due diligence process is applied if a transaction is to be made between two entities involving selling or purchasing products, either goods or services.[7] Some transactions require processing a due diligence report that includes the management aspect of it as well.[8] Here is a list of transaction that might require managerial assessments:

Mergers, acquisitions and strategic alliances. It is advised that before organizations decide to undergo a merger, an acquisition or an alliance, to perform a due diligence. This due diligence should be investigating into the management team. Many mergers and acquisitions fail because of human resources and management- related issues, such as cultural clashes. These incidents occur because of different cultural values or different individual beliefs.[9] In order to avoid such incidents, and cut off costs on the long run, the management teams must be assessed thoroughly.[8]

Partnership Before organizations signs a partnership contract, they must investigate into the other organization’s matters and affiliations, In addition to organizational structures and behaviors. This investigation is done through the management due diligence process.

Joint Venture and collaboration When it comes to forming a relationship with another organizations, it is advised to perform a management due diligence in order for one organization to be introduced to the management structure and the behavior of the individuals.[8]

Management due diligence's responsibility[edit]

Not only buyers carry out the management due diligence process, but the sellers of an organization as well. Usually, the process of selling an organization or adopting any external growth strategies require warranties to be shared. For these warranties to be created private information from the organization should be used, possibly holding activities that are prohibited from being viewed by third parties. In this case, it is usually advised that the seller is the one carrying the Due diligence process in order to ensure that the data is secured.[8]

Importance[edit]

Management due diligence ensures sustainable profit and growth for organisations in the future, as it identifies the human capital components.

It ensures that highly skilled people are assigned the correct jobs and responsibilities.[2]

Higher chances of assuring return for the capital invested, by minimizing the risks that form a threat for the organisation.[4]

Spots the strengths and weaknesses of different individuals in the management team and assess their contribution into the business organisation.[2] In addition, it is considered a tool that assesses the management team's ability to reach common goals.[10]

Identifies undiscovered dangers that may later on affect the productivity. These dangers could be unacknowledged motives or personal conflicts between different individuals in the management team.[11]

Allows organizations to appraise different candidates for a spot in its management team efficiently.[10]

After conducting a management due diligence, an organization will be able to come up with expectations on the team’s and individual performances. Accordingly, the organization can determine whether training for managers will be needed or not.[12]

Process[edit]

Since management due diligence lies in the financial analysis of a Due Diligence report,[13] It shares the same process as creating a Due Diligence report with few variations. These steps will be introduced and discussed thoroughly.

Preparation[edit]

Preparation is seen to be the key to having an effective management due diligence process. In this phase organizations will be able to gain the sufficient knowledge they need about other organizations. This will allow organizations to decide on the method of communication between them and other entities, in addition to putting the resources in place to assure a successful process. After deciding upon all of that, the organization will need to:

Form up a team to go on with the analysis process. The team should be formed from skilled people that have the enough experience to work on the case in hand. After the team is formed, responsibilities are assigned, as well as the process’s timeline. In case the organization lacks any required expertise to go on with process, it is advised to seek assistance from an external source.

Managers should get involved in this process as early as possible, as they have to be introduced to the other organization's management team. Getting introduced to them early will allow managers of one organization to know how to deal with any obstacles that might rise later on.

Checklists must be created. These checklists should be tailored especially to the particular risks associated with the other organization.

The organization should prepare a list of data requests. These data requests are the type of information an organization will need in order to go through the process.[14] Such data could be the business plan: Management Team section[15] or perhaps the management organizational structure.[16]

After negotiations a confidentiality report must be signed by both parties, in order to assure that the organizations sensitive data will not be shared with any third parties. After signing the agreement, a method to store all the confidential data will be adopted. This method could be setting up an online data room[14] which provides online repository of data, both parties would now be able to view information related to the other organisation.[17]

Execution[edit]

In this phase the organization is expected to start analyzing the data gathered. The team will be looking to confirm the target's representations, in addition to considering the "soft" aspects of the target, such as considering the organization's corporate culture. The team must make sure that the other organization is fit with its own after assessing the quality of the company's management. After gathering all the information the team is expected to give advices on whether their organization should go on with working with the other organization.

Closure[edit]

After the team is done with all the analysis regarding the management team, the report is submitted to the people responsible for taking the last decision regarding a merge or an acquisition for example. In the case that the team has exposed irregularities or unexpected risks, the organization can bid on decreasing the contract’s price. If everything passes the assessment, the members of the team pivot into integration planning mode.[14]

Aspects[edit]

By performing management due diligence to assess the individuals working in an organization, different aspects must be appraised. The diagram outlines the main aspects that must be evaluated. The four circles in the middle represent the basic qualities that are considered essential for an individual assessment. The bigger circle "Role" represents the duties of the individuals in a certain organization. These duties usually vary from one individual to another depending on the job description of that individual. The biggest circle representing the employing organization is located in a market, making it easy to get affected by various external factors.[2] These external factors are capable of hindering the organization from achieving its strategic goals and long-term objectives, making this a challenge that has to be dealt with.[18] In order for the individual assessment to be precise and accurate, it must be done after the organization's requirements have been highlighted and the responsibilities of each individual are clear. Having such knowledge enables the business organization to overcome the challenges faced in the future, which gets it a step closer to reaching its strategic objectives.[2]

Key points[edit]

Here is a list of key points that must be kept in mind when conducting a Management Due Diligence:
-Set objectives Expectations should be set in terms of management styles and qualities in individuals.
-Commitment Assess whether the resources owned will make the business succeed in terms of management.[8]
-Assess strengths The management team is seen as an asset to any organisation,[19] that’s why the strengths of individuals operating in the organization must be spotted in order to be used effectively, allowing the weaknesses to be evident as well for future improvement
-Familiarity with sector Before assessing the management team, the person doing the analysis must be familiar with the sector the organization operates in, in order to make sue that the analysis are completely reliable.[8]

Limitations & drawbacks[edit]

-In order to assure that the data is reliable, both the investor and the individuals being assessed must be involved in the feedback process, which might be found costly, and time consuming to both parties involved -Since Due Diligence in general is a detective game, organizations must find individuals that are capable of detecting small issues and opportunities. Finding individuals with experience and knowledge might be hard. Organizations sometimes decide to bring in experts from outside.[14] -The Due Diligence process is seen to be very expensive that is why it is advised to divide the process into two stages.[20] Not only this but it is also seen time consuming.[21] -Executives may really be interested in the deal that they start ignoring the risks identified in and move ahead anyway. Having to later on suffer from management issues.[14] -A method of gathering information could be interviewing the management team(s).[7] Interviews can be seen expensive and time consuming.[22] -People doing the analysis might not be familiar of the sector the organization operates in, which might lead to wrong conclusions.[19]

References[edit]

  1. ^ "Management Audit". Retrieved 28 October 2014. 
  2. ^ a b c d e "Best practice guideline- Due Diligence" (PDF). Retrieved 27 October 2014. 
  3. ^ a b "What makes a good manager". Retrieved 29 October 2014. 
  4. ^ a b "Assessment and development- Management Due Diligence". Retrieved 29 October 2014. 
  5. ^ "Senior management". Retrieved 29 October 2014. 
  6. ^ "The Five characteristics of great leaders". Retrieved 28 October 2014. 
  7. ^ a b "What is Due Diligence and how do you perform it?". Retrieved 23 October 2014. 
  8. ^ a b c d e f "Meaning of due diligence" (PDF). Retrieved 24 October 2014. 
  9. ^ "Merger Due Diligence- The devil in details". Retrieved 29 October 2014. 
  10. ^ a b "Management Due Diligence". Retrieved 29 October 2014. 
  11. ^ "Due Diligence- The management team aspect: who's driving your company". Retrieved 29 October 2014. 
  12. ^ "Performance appraisal for teams" (PDF). Retrieved 28 October 2014. 
  13. ^ "Due Diligence". Retrieved 27 October 2014. 
  14. ^ a b c d e "Due Diligence: Main steps and success factors" (PDF). Retrieved 29 October 2014. 
  15. ^ "Due Diligence information request" (PDF). Retrieved 30 October 2014. 
  16. ^ "Sample Due Diligence request list" (PDF). Retrieved 30 October 2014. 
  17. ^ "Virtual Data Room". Retrieved 29 October 2014. 
  18. ^ "External Factors". Retrieved 29 October 2014. 
  19. ^ a b "The most important assets are not on the balance sheet". Retrieved 31 October 2014. 
  20. ^ "PRELIMINARY DUE DILIGENCE (This is the 9th article in the series on M&A)". Retrieved 30 October 2014. 
  21. ^ "Due Diligence in mergers and acquisition". Retrieved 29 October 2014. 
  22. ^ "Interviews". Retrieved 31 October 2014.