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Too many executives treat diligence as an audit to confirm what they think they know, rather than a solution to the problem of "I don't know what I don't know."

[In M&A] it’s essential to formulate a strong, well-articulated deal thesis in advance and to concentrate analysis on proving it from the bottom up. All deal theses should answer the question: “How will buying this business make my existing business more valuable?” If a potential transaction has strategic value, the assertion needs to be backed up with customer input, competitor insight, new industry data and analysis about how profit pools are likely to evolve.

Efficacy flows from asking the big questions about a deal from conception and focusing analysis on the few things that truly drive value. What factors result in superior performance and competitive advantage, and are these forces likely to stay in place during the foreseeable future? How dependent is the earnings stream on the existing management team, and what happens if they leave or their incentives change? Has the asset been dressed up for sale? What is the potential exit strategy if things go wrong?

An essential part of this process is knowing what you don’t know about a target and being diligent in understanding why a business is, or isn’t, attractive.

The crux of due diligence is the need to mitigate overall transaction risk through the identification , quantification and substantiation of value drivers or value inhibitors, and to recognize the differences, if any, between these and what was the basis of anticipated deal value at the beginning of the process.

For every transaction, one can define a transaction value matrix, which frames the key sources of value to be derived from the target either alone or as a synergy from the combined operation. The due diligence process endeavors to substantiate these value metrics and begins the planning which can increase the likelihood of realizing significant value from different parts of the deal matrix. In short, when looking at the value of the target, due diligence helps identify what actually exists.