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How NFDD can be a breaking point with M&A consultant Margareta Křížová

Margareta Křížová has more than 27 years of experience with business mentoring and M&A consultancy. She works with entrepreneurs, companies and startups on designing their business strategies, consulting during company sales, and investor onboarding for startups. She leads the business accelerator at NEWTON University and works as a mentor in several other entrepreneurial incubators. Bizbooks publishing house published her book “Z deníku investorky” (Diary of an Investor).

What areas should due diligence cover during a business acquisition?

I advocate for a holistic approach to due diligence. By this, I mean that financial aspects and numbers aren’t the only information that matters and checks should also cover non-financial - “soft” - issues, for example, the company culture or the perception of the acquisition by the company’s employees. A case where this side of due diligence was neglected was the attempt to merge Pfizer and AstraZeneca, which was not completed due to strong opposition from the British government, the public, and the company’s employees. One of the reasons behind the resistance was the concern that the merger would sideline the British company’s R&D, a nationwide topic that the “hard” side of due diligence could not uncover. For comprehensive results, it is necessary to combine exact data with information about the company’s behaviour, its culture, the public perception of the company in the given country as well as the current topics resonating in public discourse, and how future synergies might work.

Is it therefore suitable to conduct pre-due diligence of the environment during large cross-border transactions?

During cross-border transactions, you are entering a market which may culturally differ from your domestic environment, including a different company culture. And that can be a problem, especially if you aren’t prepared to deal with these differences. A good example is DaimlerChrysler (1998-2007), the merger of a conservative German brand with American Chrysler, which had an entirely different decision-making process and agile leadership. The corporate environments were incompatible and while the transaction was completed, the companies ended up separating again. It took several years before it became apparent that their long-term cooperation was unviable. And honestly, dismantling a completed transaction is technically more complicated than negotiating it in the first place.

Which non-financial factors key to successful due diligence and risk minimization are often forgotten during acquisitions?

I’m going to repeat myself, but badly managed cultural differences can present a major issue, including on the level of employee culture. If you don’t have employees who are “all buy-in”, you could prepare the best post-transaction strategy, but employees’ passive resistance or so-called “quiet quitting” could slow it down. Simultaneously, it’s such a “soft” subject area that it is easily underestimated. Another major question is of course integrity. On one side, there is management integrity, the lack thereof can be resolved via personal changes. On the other, there is the systemic issue of long-term non-transparent and creative accounting, which can escalate to the point where it causes the definitive end of all business activity. Take the bankruptcy of Enron in 2001. This is, of course, a serious issue, which brings with it a key reputational risk for the buyer if such practices are not revealed in time. It is also necessary to assess the history of past tenders, both those commissioned and those the acquired company took part in. A non-transparent history can cast a negative light on the new owner and become a reputational obstacle when securing new contracts.

Based on your experience, how strongly are non-financial – “soft” – evaluations established in the Czech Republic?

When I worked on transactions during the 1990s up until 2000, this practice was non-existent and was only introduced by large consultancy firms, which arrived especially with buyers from the English-speaking world. Today, NFDD is observed by buyers from abroad or regional investors and buyers who are experienced, and know that non-financial factors are significant for the success of transactions and the post-transaction phase, especially. On the other hand, NFDD often isn’t awarded as much attention during medium-sized transactions, particularly due to the costs. But especially when it comes to buyers listed on the stock exchange or large-volume private transactions, educated and experienced managers and buyers do not underestimate NFDD. I will add that NFDD is also useful for the sell-side to manage reputation. If the seller cares about the continuity of the brand and product/service, the employees, and the future of the company, they will check the buyer’s integrity, including whether their post-acquisition strategy is supported by true knowledge of the market, to ensure the company will continue to prosper.

You have been mentioning large transactions. Is non-financial due diligence also relevant for startup transactions, and how?

In the case of startup transactions, NFDD comes into play during later investment rounds, when venture capital or private equity gets involved. Given that investment fund shareholders are often large institutional investors listed on the stock exchange, fund managers must be particularly vigilant and verify the startups they plan to invest in. Here it is not only integrity that is important, but for example, also checking their activity on social media and verifying that the startup and its founders are not sharing “hate speech” or other content, which could hurt the reputation of the investor or their shareholders. We have now moved from conservative corporations to the world of millennials and Gen Z, and it’s necessary to adapt the focus of NFDD checks accordingly. However, startup founders should also definitely not forget to assess investors when acquiring early-stage investments. It is necessary to question the source of the investment during this phase when securing investment can “make it or break it”. This is especially true during the earliest investment phase when the startup is dealing with angel investors. A typical example of an angel investor is a company founder, who has exited their business, or an active top manager (CEO/CFO), both of whom have a verifiable track record and high-quality references. NFDD during a startup’s entrance onto foreign markets and search for business partners and investors is a chapter in itself. It is crucial at this stage. I’m thinking of the example of a Czech startup I recently worked with, which had secured foreign investment from the UK. The performed due diligence covered the “classic” issues, but only when the startup was preparing another investment round were issues with their investor’s integrity revealed. The solution, including the exit of the problematic investor, cost money, time, and energy, when a single solution could have prevented it all – non-financial due diligence.


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