Evolving Due Diligence processes

Metricson's new due diligence service

At Metricson, after working and interacting with numerous startups and technology companies over the years, we have noticed an alarming trend: Due Diligence processes, in many cases, have been transformed into a bureaucratic formality that causes frustration for both companies and investors. Due diligence processes are broken because we have forgotten what they are for and, along the way, we have turned a valuable tool into a purely mechanical and meaningless ritual.

Why have we forgotten the purpose of Due Diligence?

Due Diligence is a key process for assessing the risks and opportunities of an investment or acquisition transaction. But often, the execution of these processes is not aligned with their true purpose. This has led to situations where both the companies being assessed and the consultants end up frustrated and, worse, the resulting reports do not provide clear value for either party.

Our main learning is that due diligence reports have become a necessary evil because the incentives of the parties are misaligned and the benefits are intangible, if not uncertain.

On the one hand, the companies analysed (targets) waste tens or hundreds of hours of key people in their team searching for useful information and justifying themselves to people who have no interest in their business. On the other hand, consultants end up disappointed because they have no way of getting the information they need, so the reports end up being merely quantitative, not very useful and do not reflect the real situation of the companies.

Finally, investors or buyers often do not know what to do with the information obtained. Sometimes they take advantage of it to negotiate down the value of the target company, sometimes they decide to reject the operation due to the relevance of the contingencies detected and, in most cases, they end up including more or less standard and increasingly exhaustive representations and warranties (R&Ws).

Redefining the Due Diligence process

After meeting with several companies to open a space for reflection, we saw certain points that could help us to add value to this process.

Precisely on the basis of this analysis, we have started to take steps to redefine the way in which Due Diligence reports are approached and executed:

Not all Due Diligence is the same

We segment the different types of DD reports very well, minimising the cost and impact on the work of the target companies and maximising the value for the investor/buyer, depending on the objective.

The report must be of value to all parties

We ensure that the report is of value to all parties, but most importantly to the target company, which is doing most of the work. That is why our reports contain clear recommendations, and time-bound action plans that make them easy to implement.

Get the initial checklist right

This can be 50% of the project’s success; many consultants produce huge, standard checklists that require an absurd amount of effort on the part of the companies being analysed. A good checklist reduces friction and allows us to focus on the relevant issues. At Metricson we customise initial checklists to focus on relevant issues.

Use technology to optimise time

There are many technology-based solutions that reduce time; artificial intelligence is able to detect patterns and contingencies that are very difficult to identify manually, but you have to ask the right questions and obtain the minimum necessary information. For this reason, we use our own technology and procedures and those of third parties, which allow us to be much more agile in obtaining and reviewing information.

Due Diligence tailored to the needs of each company

Ok, we have created new processes and implemented new technological solutions to simplify and add value to Due Diligences. But that’s not all, far from it.

We have also innovated in the type of Due Diligence reports we offer to the market. Thus, along with the typical investment or acquisition reports (vendor’s due diligence), we have created vertical Due Diligence reports that allow us to resolve doubts and detect problems in critical but little explored areas such as:

  • self-diagnosis or red flags: these are reports aimed at companies – not buyers or investors – that want to discover and avoid the risks associated with their growth and maximise their value in a future operation. It is a simple report, with concrete recommendations and an action plan to accelerate as much as possible the catch-up and compliance with legal requirements.
  • financial due diligence: in-depth analysis of the company’s solvency and sustainability, as well as the main ratios and economic indicators that allow us to analyse its management and capacity to face future challenges.
  • technological due diligence: when a company’s assets are based on its technology, any analysis is incomplete if it does not include the scalability and maintainability of the technology.
  • ESG and impact: more and more companies are concerned about sustainability and are becoming more responsible and respectful. At the same time, more and more investors are subject to strict rules to consider their operations as impactful (articles 6, 8 and 9 SFDR). This report aims to analyse compliance with these requirements.
  • AI + IP: firms developing, deploying, using or otherwise exploiting AI-based tools are subject to specific risks in the way they train and exploit them in their daily operations. This report detects these risks and proposes corrective measures to ensure proper compliance with current laws.

Now we present our new Due Diligence service, fully professionalised with different options and taking into account the different verticals, which will help you achieve the objective you are looking for, focusing our work on getting the information you need and delivering a document that is really useful for you.

Luis GosalbezArticle written by:

Luis Gosálbez

Managing Partner

luis@metricson.com

About Metricson

Metricson is a pioneer in legal services for innovative and technology companies. Since its inception in 2009, it has advised more than 1,400 companies from 14 different countries, including startups, investors, large corporations, universities, institutions and governments.

If you would like to contact us for any aspect of legal advice, please do not hesitate to write to us at contacto@metricson.com. We look forward to talking to you!

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