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Private Equity

5 Overlooked Due Diligence Areas


This guest post is written by Andrew Farrell, a private equity professional. 

Spending copious dollars and hours on due diligence doesn’t guarantee the right decision on whether or not to pull the trigger on a transaction. It’s always about the quality and not the quantity of information gathered. And often, going directly to sources off the beaten track turns up the “good stuff.” Every buyer is going to have their standard checklists, but persistently blending creativity with pragmatism can yield useful results in a often overly formulaic process.

Here are five overlooked sources that I’ve found can materially improve¬†the overall quality of your diligence.

1.  Local Journalists

A couple weeks ago, I was researching a competitive landscape for my employer, a PE firm, regarding a prospective acquisition. We had heard a rumor about a potential competitor opening near the target company, but we couldn’t validate the rumor.

After a day of fruitless phone calls, I dialed up a reporter at the local paper. It turned out that he had just visited the new company the week before for an upcoming story and shared some details on the company’s timeline, layout, management, and pricing. The information became an important part of our assumptions on the competitive landscape facing the prospective acquisition.

Local paper reporters provide valuable “scuttle” on specific geographic markets. And as a former journalist, I can attest that the one thing a writer enjoys as much as people reading his or her stories, is people talking about them.

2.  The Guy with the Axe to Grind

The due diligence process can easily turn into an exercise in reactivity. The target provides customer contacts and the acquisition team labors down the list. Chances are that the hand-picked references will only have good things to say.

Thankfully the internet, professional expert networks, and social networks make it easier than ever to find people with diverse perspectives. Anybody that was pushed out of the company is a good candidate and they’re often just a LinkedIn search away. Within LinkedIn, you can search by company and then filter for past employees.

Reach out, be friendly and transparent about why you’re contacting them, and you’ll often get a response. Remember that former employees can have biased answers for lots of reasons, but they can still be very helpful. Know your source, and proceed accordingly.

3.  A Former Customer

Sometimes, speaking with current customers is exactly what you shouldn’t be spending your time on. Instead, find non-customers or former customers who have moved on to new providers, or who are now satisfying the relevant need in-house. Their perspective is arguably more important than those of the satisfied customers.

Former customers can provide useful product feedback, especially in situations where churn or turnover rate is a concern. It’s the former ones that have discovered a product shortcoming or a superior competitor.

This group can also be helpful in another way. VC Clint Chao recalls an investor giving him 24 hours to provide a list of 50 of his former clients as references. If management can produce a list like that, you know they’re doing something right.

4. ¬†A Devil’s Advocate

Investment bankers, lawyers and consultants involved in an acquisition have a fee structure that rewards a consummated deal substantively¬†more generously than one that falls through. To borrow from Buffett, “Don’t ask the barber whether you need a haircut.” If you have to rely on a banker for advice on the transaction decision, Buffett suggests getting a second opinion. “Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through.”

Maybe this is overkill, but getting input from someone informed who continues to question the value of the deal can be beneficial.

5. ¬†A “Front-Line” Employee

Current employees well below management in the corporate structure have an important story to tell. They can provide information on the culture, attitude and vibe of a company. Call the 1-800 number or request a price quote through the website. How easy is it to do business with the company and how responsive are they?

Front-line employees can also demonstrate a business’s strengths and potential. Billionaire¬†Sam Wyly tells of a key epiphany during his acquisition of the craft chain Michaels. While visiting a store, he watched the employee in charge of picture framing. As he witnessed the connection the framer had with customers handing over cherished items, he saw opportunity. Wyly subsequently orchestrated the development of a custom framing department that became a key profit driver for the chain.


Sometimes it’s spending 15 minutes with the right person, and not years of research, that provides the critical insight a buyer is looking for.

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