Due diligence in the New Normal

written by: Jonathan Dunlop

Focused and thorough due diligence has always been a critical component in the proper evaluation of a target business.  

Properly done, good due diligence identifies the risks and opportunities in a target business, flushes out key matters to be negotiated, informs deal value and enables effective post acquisition planning.  

​​The new normal is often used to refer to a post pandemic world, however it really is much more than that. ​

 As well as being a major global health issue, the pandemic has accelerated and amplified collective awareness of issues of concern that have been with us for some time.  In particular, geo-political tensions, breakdown of global systems, economic inequality, racial inequality and climate change, to name but a few.
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In the new normal, the business environment is changing at an unprecedented pace, businesses are responding rapidly and, for those considering making investments, the importance of doing thorough due diligence has never been greater.  

Businesses are operating in an environment that is changing quickly

The changes we are seeing in the business environment include:

• more volatility, with higher peaks and lower troughs, over extended timeframes;
• local goods and services being preferred over those from other parts of the world;
• increasing preference for contact free commerce;
• new government regulation, including workplace health and safety, local procurement incentivisation and taxation stimulus; and
• greater levels of scrutiny of corporate purpose and activity.

Businesses are reshaping for success at high speed

There is no question that in the new normal, customer behaviours will be different.  Some industries will be compelled to restructure.  Market positions will shift drastically.  Businesses that are taking action now will be those that come out on top.
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Many business leaders have publicly discussed the desire to preserve the perceived benefits arising from the new ways of working established during the pandemic lockdown, including flattening of management structures, flexibility in responding to clients and rapid decision making.  These leaders are already reshaping their businesses to be successful in the new normal:  

• renewing the focus on revenue generation, recognising it is fundamental; 
• building new partner networks to facilitate identification, capture and delivery of business opportunities;
• reviewing operations, including workforce flexibility, supply chain diversification and value chain digitisation and automation; 
• reducing organisational complexity by eliminating the bureaucratic middle and shifting cultures to be learning and innovation rich; 
• driving towards real time information to support rapid decision making, investing in data, internet of things and artificial intelligence; and 
• demanding greater cost transparency to enable stronger cost management, including turning costs previously considered as fixed into variable costs through outsourcing.  

Robust due diligence is more essential than ever before

In a well conducted due diligence the historical and prospective performance of a target business are closely assessed and an inside looking out perspective is as important as an outside looking in perspective.  

Business performance in the new normal may differ drastically from past performance.  Understanding past performance remains important.  However, it is much more important to identify what will change in the external environment and understand how the target business needs to respond. 

In every extended industry value chain, ultimately at one end there is a consumer, a person.  Understanding whether and how that consumer’s buying behaviour is changing is vital to developing a view about the size and growth rates of the (possibly intermediate) market that the target business sells to.  

Extended industry value chain analysis can assist with understanding how the business shifts arising from the new normal might manifest.  These are likely to be significant for many industries and for the futures of businesses in those industries.

​Changes in competitive landscapes require more analysis.  Some companies will be acting quickly and have the cash reserves to weather a downturn, or chase new opportunities, or invest in change. Others will be slow to respond or cash strapped or both.  Businesses that were previously dominant in their markets may be usurped by smaller, more nimble players.

Inside target businesses, transformation will be happening.  Evaluating whether the changes are the right ones in the right timeframe, and whether management has the implementation capability required, can only be done after developing a deeply considered view about the external environment.  

Even a thorough evaluation of the likely shifts in the external environment and how the target business is responding will not provide a crystal-clear picture.  Sensitivity analysis is useful and should be used.  Scenario analysis is even better, particularly if likelihood assessments can be assigned to base, worst and best case scenarios.  
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Doing a deal well requires a robust due diligence.  As we move into the new normal, this has never been truer.