I’ve been working in the due diligence practice at Grant Thornton for eighteen years now, and during that time I’ve often seen how vulnerable a deal can become during due diligence. This is partly fueled by the persistent notion that every transaction has winners and losers.
That’s really unfair: a good deal should, in fact, create value for both parties.
It is precisely during the due diligence phase that this joint outcome comes under pressure. The buyer is constantly faced with uncertainty. How many other potential buyers am I competing against? Did I bid too high? How can I prevent results from declining after the acquisition? And how will employees, customers, and the market react?
A natural symptom of that uncertainty is that the buyer asks more and more questions—and increasingly detailed ones at that. To the seller, however, this barrage of questions can come across as distrust. This, in turn, creates uncertainty on the seller’s side as well. Is the buyer still enthusiastic? Is my company a good fit for this party? Do I still want to continue working with this buyer after the deal?
Address the uncertainty behind the question
But if you understand the reasons behind the other party’s behavior, you can not only reduce uncertainty or mistrust, but also manage it strategically. A simple example illustrates this point.
This way, you’re not only meeting the need for information, but you’re also reducing uncertainty and working to build trust.
Trust Matrix
The interplay between the buyer’s uncertainty and the seller’s perceived distrust can be summarized in a simple 2x2 model.
In the “DD death spiral,” uncertainty on the buyer’s part leads to more questions. These questions trigger defensive reactions from the seller. The buyer becomes more suspicious and then asks even more questions. The exchange of information deteriorates precisely at the moment when both parties need it most.
Checklist for entering the trust zone
The trick for the buyer is to avoid letting uncertainty feel like mistrust. The trick for the seller is to recognize the uncertainty behind every question—the uncertainty the buyer is trying to resolve. Information is the currency of due diligence, but trust ultimately determines how much information is needed.
