During site visits, pay attention to seemingly small operational flaws, such as a server located in a kitchen. These details are often symptoms of a much larger, systemic lack of process, security, and risk management within the target organization that diligence checklists might miss.
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Customers describe an idealized version of their world in interviews. To understand their true problems and workflows, you must be physically present. This uncovers the crucial gap between their perception and day-to-day reality.
Formal cultural diligence can be staged. A more authentic assessment comes from informal settings. Observing how a target CEO and their team treat service staff reveals their true character and provides a powerful, unfiltered indicator of cultural compatibility or potential red flags for integration.
The legally required 'risks' section in a public company's annual report is a goldmine detailing a CFO's biggest concerns. If you can demonstrate how your solution mitigates one of these specific, documented risks, you immediately become a strategic partner.
An acquisition target with a valuation that seems 'too good to be true' is a major red flag. The low price often conceals deep-seated issues, such as warring co-founders or founders secretly planning to compete post-acquisition. Diligence on people and their motivations is more critical than just analyzing the financials in these cases.
The "Discovery Tree" maps problems in three layers: Situation (how they do it today), Operational Problem (daily annoyance), and Executive Problem (C-level risk, e.g., getting sued). Focusing only on operational issues leads to small deals; connecting them to executive-level risks is necessary to justify a large investment.
An expert reveals two shocking statistics: 80% of new founders fail their first diligence attempt, and 85% of early-stage investors don't perform confirmatory diligence. This highlights a massive, systemic weakness and inefficiency in the startup ecosystem, creating significant risk on both sides of the table.
Not all business problems are created equal. Time savings often translate to five-figure cost savings, which may not be compelling. The most powerful executive problems are "six-figure problems"—major risk mitigation (avoiding lawsuits), significant revenue generation, or replacing other large costs.
Instead of an immediate post-close review, conduct retrospectives 6-12 months later. The true quality of due diligence and strategic fit can only be assessed after operating the business for a period. This delay provides deeper insights into what was missed or correctly identified, leading to more meaningful process improvements.
Instead of labeling a potential issue like negative cash flow as a definitive "red flag," which can be misleading, view it as a "flammable item." By itself, it may be harmless. The real danger only materializes when a "spark"—a catalyst like a new competitor or rising interest rates—is introduced.
If a deal team says, "don't bring the integration people in because they'll mess up the deal," it is a massive red flag. This indicates they are likely sugarcoating problems and painting an overly optimistic picture for the seller, virtually guaranteeing post-close surprises and failure.