M&A Financial Due Diligence — who does well?
M&A financial due diligence is a weird job. It’s not really traditional finance, nor accounting. Nor does it consistently comprise analytics and writing either. The job is usually some combination of the above, which is largely dependent on the the employer, client, and transaction type (buy-side, sell-side, carve-out, minority investment, etc.). This sometimes makes it difficult for me to generalize which type of people and skill sets tend to do best at this job. However, for those thinking about a career in financial due diligence, I’ll attempt to provide an answer in this post.
Over the past couple of years, I’ve observed the following skill sets and qualities from the top financial due diligence professionals:
General business acumen and industry knowledge
You’d think these are obvious requirements, but you’d be surprised how often people fail on this end of the spectrum. I’ve known professionals who could build some gnarly revenue retention analyses and financial models; however, technical knowledge alone isn’t enough. The ability to interpret and speak to the outputs of various analyses is much more important, especially as you take on leadership roles. Those who can only run the numbers tend not to do well for too long.
For example, you should be able to explain to your team why the company’s Product X ARR retention of 85% doesn’t appear to make sense based on (i) what management has said in meeting, (ii) other data points observed, and (iii) the industry standard for similar companies — that’s the real diligence. Calculating the 85% retention is a small part of the equation.
Very few people are naturally great at this; for the rest us, it takes a lot of reading, discussions, training, and podcasts to stay in tip-top shape.
Adaptability
Adaptability can mean a lot of things both professionally and personally. In many ways, no two deals are the same. They vary in terms of timeline, types of reports produced, and team size. As a result, those who tend to do the best in this profession are good at rolling with the punches. Those who are more comfortable with set schedules (including auditors who know when to expect longer hours) struggle to adapt to this job.
Let me give you an idea of two very different project types:
(i) Sell-side project. Fly to a small town with a small team and spend a few days with the management team. Understand the business, process data, and write a long, comprehensive sell-side report as the company prepares for a sale. Some longer nights, but overall five days per week of work. Low stress.
(ii) Buy-side project. Spend days with your client’s teams (finance, ops, product, etc.) to understand how each team believes the target company will perform or spend the day with the target company’s management. At night when you actually have time to do your job, build a financial model for the client to reflect the views of various teams you’ve met on both sides. Expect to work weekends and receive frantic calls at any time of day, sometimes from your teams, other times from other parties involved with the deal. High stress.
Same job. Very different day-to-day environments. You need to be comfortable doing both.
I’ll be honest, folks tend to see this as a positive about the job because it keeps things interesting. And that’s partly true; however, this excitement tends to degrade over time as you start wishing you can make dinner plans and know you’ll be able to make it.
Communication
Let’s say that you’re extremely adaptable, your industry knowledge is up to date, and your technical skills are tremendous. Is that enough? For some, yes, but the ultimate goal is to also be able to communicate well — with your team and clients. By this, I don’t mind mean solely being able to have witty banter with clients so they like you. You also need to be able to have difficult discussions, such as:
- Your client really needs this deal to be successful. However, your team believes it found a “fatal flaw” that should kill the deal. How do you best communicate this to your client?
- The manager on the deal is doing a phenomenal job with the deliverable but is terrorizing the associates. How do you lift team spirits without compromising the great work quality?
- You promised the client a deliverable by Friday afternoon at the latest. The deadline is close and you know you can’t meet it. How do you communicate this to the client without hurting the relationship.
These are only a few examples and many situations you won’t see coming arise in real-time that need immediate responses. It’s an art form that takes time to develop.
Obviously, this isn’t a comprehensive list, but I think it encompasses three commonly overlooked skills that are exhibited by top performers with whom I’ve worked.
One last thing— people often ask about the backgrounds of folks working in M&A financial due diligence, particularly at the Big 4 firms. In my particular group, people’s backgrounds include former Big 4 auditors, FP&A professionals, and even hedge fund investors. The vast majority of people were former Big 4 auditors, though. These firms are risk-averse in this sense and like to hire known commodities from other groups. However, this does not mean that a great auditor makes for a great due diligence professional. Sometimes, it’s the exact opposite.
Hope that was a quick and helpful read for those of you considering a career in this space. Feel free to reach out directly to me with questions.
Cheers!
