Due Diligence: The Three Buckets of Critical Information

In performing due diligence, I recommend you look not only for risks but also for opportunities.

That’s how I approach due diligence for our Capstone clients.  As we examine the seller’s operations and books, we place every new discovery in one of three color-coded “buckets:”

Red Bucket: Deal Changers. This is information that materially alters what you thought you were buying. These are the true surprises that can seriously affect the deal, such as a previously unknown pending court case on a key technology or a likely decline in revenue.

Yellow Bucket: Acceptable Risks. These are new items that you discover about the seller that you can live with but can’t ignore. For example, a new product that you expected in six months may not be ready to go to market for a year. You would probably not cancel the deal because of this, but it’s still something you will have to take into account and alter your plans accordingly.

Green Bucket: Integration Opportunities. This is information that adds value and synergies to the deal, usually in the form of cost savings or revenue growth. A typical example occurs in the purchasing department, where the seller may be paying a significant percentage more than you would because he is not ordering in the volume necessary to reach price breaks.

The bucket method will help you to identify risks and opportunities within the larger focus of your strategic objective. I find the bucket method allows for constructive discussion between both buyer and seller on possible solutions to any risks that may be identified.

*This post was adapted from David Braun’s Successful Acquisitions, available at Amazon.com