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.” The focus on getting the deal done leads to reliance on conventional wisdom that flows from off-the-shelf information or standard industry research. In fact, diligence is a critical step to test and quantify what seems like a good idea.
The key to effective diligence is recognizing that you are making an over/under bet versus the conventional wisdom. The most successful acquirers consistently uncover a deal’s hidden upside, which allows them to bet the “over.” But they are also careful to fully anticipate the downside, making sure potential risks are well understood. With that understanding, they can calculate when to bet the “under.”