Mike Stiles, Director at The Quinn Partnership Management Consultants, the UK’s leading provider of Management Due Diligence, advises Investment Directors on how to introduce due diligence to management teams.

Investment Directors put a lot of effort into building rapport and winning the trust of a management team, but this can sometimes be hampered when faced with telling them that an objective evaluation of their capability is needed.

The process of management due diligence is often poorly communicated and the least palatable from a management team perspective who may feel a sense of scrutiny. They are being asked to go through perhaps the most intimate level of due diligence which by its very nature, requires a high level of external examination.

With the pressure to perform in their day job, as well as complete the upcoming transaction, it comes as no surprise that some Investment Directors find it difficult to ask management teams, particularly the more emotionally reactive ones, to jump through another perceived hoop. This is also often exacerbated if they have conveniently forgotten to mention this element of due diligence until late on in the process.

The team needs to be reassured that this process isn’t just about analysis but development. The process of management due diligence not only helps identify strengths but helps shape a plan that aligns management capabilities with business need. By understanding the dynamics of the team, strategic action points can be framed to help work towards the next financial event.

In many deals we find that Management Due Diligence is too narrowly scoped and does not sufficiently focus on Tier 2 level management who are often the main engine for future growth.

Our concept of Human Capital Planning is an evolution of our approach to Management Due Diligence and can act as a road map for the journey going forward. With a focus on the next financial exit we want to ensure that the team can showcase the best possible version of themselves with an accompanying authentic narrative. Our Management Due Diligence Report is the first step in setting this agenda.

Having worked on over 500 deals, we understand the different approaches that Investment Directors need to take when tackling the subject of due diligence and have developed some advice and tips to help when explaining the process to management teams:

Ask your due diligence provider to speak to the management team as early on in the process as possible and manage expectations realistically.
Communicate the purpose with clarity – explain to the management team what is involved in the process and the time demands of each stage.

Highlight that the process will help generate greater understanding and insight on how to use the existing talents of individuals in order to achieve success.
Our approach reminds people what they are good at and is not there to trip them up.
Due diligence shouldn’t be seen as a barrier but a supportive tool – explain that the approach will give an objective comment on where the team is strongest and also where there are areas for development or support.

Explain that everyone works differently and this process is about understanding how they operate so that the Investor can get the best out of them and develop the most productive working relationships with team.

Stress that the management team is the most important aspects of the investment and therefore you need to know how best to work with and support each other.
Although Management Due Diligence is a structured process it is developmental and enjoyable and isn’t something that the team need to be worried about.
Explain that it’s not just the final reports that matter, but also how the team acts and manage through the process that generates insight into how they work. Far too often management focus on the analytical tools whilst we focus on the behaviours.

Supplement the insight given by profiling with a rounded referencing exercise.
The Quinn Partnership is the UK’s leading provider of Management Due Diligence and has been named ‘Management Due Diligence Firm of the Year’ for the past 5 years, working closely with Private Equity. For more information call 0161 924 2280.