Performing Soft Due Diligence
Conducting soft due diligence is not an exact science. Some acquiring firms treat it very formally, including it as an official stage of the pre-deal phase. Other firms are less targeted; they might spend more time and effort on the human resources side and have no defined criteria for success.
Soft due diligence should focus on how well a targeted workforce will mesh with the acquiring corporation’s culture. If the cultures do not seem like an ideal fit, concessions might have to be made, which could include personnel decisions, particularly with top executives and other influential employees.
Hard and soft due diligence intertwine when it comes to compensation and incentive programs. These programs are not only based on real numbers, making them easy to incorporate into post-acquisition planning but they can also be discussed with employees and used to gauge cultural impact. Soft due diligence is concerned with employee motivation, and compensation packages are specifically constructed to influence those motivations. It is not a panacea or a cure-all band-aid, but soft due diligence can help the acquiring firm predict whether a compensation program can be implemented to improve the success of a deal.
Soft due diligence can also concern itself with the target company’s customers. Even if the target employees accept the cultural and operational shifts from the takeover, the target customers and clients may well resent a change (actual or perceived) in service, products, procedures, or even names. This is why many M&A analyses now include customer reviews, supplier reviews, and test market data.
A financial advisor should be doing due diligence on funds or products they are interested in for clients. Researching any regulatory actions that may have taken place at an investment management firm. Advisors should also make sure to research whether or not an investment firm has been involved in any kind of lawsuits, including those that were settled outside of court.
Bankruptcy filings and criminal records can also be found in locations where a particular manager may reside or work and are another example of documents that should be reviewed. Clearly, they would serve as a red flag when considering whether or not to do business with this firm. Another important step to take is to verify the educational credentials of the manager.
Recommending a Fund
Looking at the performance history and track record of a manager’s funds is also a key part of the due diligence process. An advisor may even want to talk to various people working in other departments of the investment firm to get a sense of what has been happening there. This approach may help in learning about issues that may not be disclosed in the company’s literature.
Another key area to examine fully is the fund’s assets or holdings. It’s important to make sure that the investments in a fund are in line with similar funds or with its key benchmarks and that the fund is not invested outside of its mandate, as this will affect performance. Relying on due diligence provided by turnkey asset management programs can be useful, but advisers should still make sure to thoroughly review these programs to find out what they cover.
Meet with the Manager
If possible, speaking with a money manager can be helpful, particularly when the manager is investing in alternative products. Some investment vehicles, such as hedge funds, hold certain proprietary information or follow certain strategies that they are not required to disclose in written documents. In addition, advisers should be looking for any disciplinary history an investment firm has imposed on a manager and find out if the firm is willing to talk about it.