Preparing for Due Diligence
Introduction
Preparing for due diligence, whether it's for an investment or acquisition, can feel overwhelming. With countless checklists and consultant advice available, it's easy to lose sight of what truly matters.
Contracts, agreements, financial documents, records, strategies, analyses, plans, memos—these are all essential. But they are just the basics. Most companies manage to get these right because they have to.
However, if you ask any investor about the crucial factors, you're likely to hear three things: Team, Market, and Product. In that order. While documents can paint a compelling picture of the market opportunity and the product, what about the most vital element: the team?
Will the wheels stay on when the ride gets bumpy?
Documents have the power to tell stories of the past and present. When looked at closely, they reveal the skills of the founders and the leadership team. But what really matters is not the past, it's the future.
No legal document or plan can predict the challenges the company will face or how the leadership team will overcome them. In this ever-changing world, being adaptable is most important.
The investor's main concern is understanding the team's ability to handle any obstacle that comes their way. The scenario that every investor wants to avoid is that there is a hidden interpersonal issue in the leadership team that will pop into the surface when going gets tough, and it will.
It's not just about individual founders or leaders, it's about the team's capability to sort their issues and keep executing.
The two dimensions of a robust leadership team
Dimension 1: Team Composition
The effectiveness of a leadership team significantly increases when it comprises individuals with a wide range of personalities and work preferences. Such diversity ensures that various aspects of work, from idea generation to execution and follow-up, are handled by those most naturally suited to them.
Some team members excel in brainstorming and innovative thinking, bringing fresh perspectives and challenging conventional approaches. Others shine in planning and organizing, turning abstract ideas into actionable plans. There are those who energize and motivate the team, driving projects forward with enthusiasm, while some members focus on the finer details, ensuring accuracy and quality in execution. Finally, certain individuals are adept at seeing projects through to completion, ensuring persistence and follow-through.
Equally important is the blend of different personality traits within the team. Some members are naturally decisive and assertive, driving decision-making processes efficiently. Others bring a high level of empathy and collaboration, fostering team harmony and understanding. Certain individuals contribute a steady and reliable approach, maintaining consistency and stability, while others offer critical and analytical thinking, essential for problem-solving and quality control.
Crucially, when each team member is aware of their own strengths, weaknesses, preferences, and stress triggers, as well as those of their colleagues, the team operates with a higher degree of empathy and efficiency. This self-awareness and mutual understanding allow for the strategic assignment of tasks, effective communication, and a well-rounded approach to challenges. It also helps in anticipating and mitigating potential conflicts or stress points within the team.
A leadership team characterized by a broad spectrum of work styles and personality traits, combined with a deep understanding of these differences, is better equipped to navigate complex challenges and foster innovation.
Dimension 2: Team cohesiveness
A cohesive leadership team is characterized by several essential elements that allow it to function effectively and harmoniously. The first and most fundamental element is a deep sense of trust among team members. This goes beyond mere professional reliability; it involves openness and vulnerability, where individuals feel safe to share their weaknesses, mistakes, and concerns without fear of judgment.
From this foundation of trust, a healthy and productive approach to conflict is fostered. Team members feel comfortable engaging in open, honest, and sometimes passionate debates. This isn’t about personal disputes but a constructive discourse where diverse ideas and perspectives are valued and debated to reach the best possible outcomes.
Commitment is another crucial aspect. This commitment is not just about agreeing with decisions; it's about shared clarity and buy-in to the team’s goals and strategies, even in the face of initial disagreement or uncertainty. This level of commitment ensures that all team members are moving in the same direction with a shared purpose.
Accountability plays a key role in cohesive teams. Rather than relying solely on a hierarchical structure, team members hold each other accountable. This peer-to-peer accountability ensures that standards are maintained and commitments are met, fostering a culture of high performance and mutual respect.
Finally, the focus on collective results is what drives a cohesive team. The team’s success is prioritized over individual achievements. Members of the team are dedicated to achieving shared goals and understand that their success is intrinsically linked to the success of the team as a whole.
These elements are interdependent and collectively contribute to the strength and effectiveness of a leadership team. The absence of any of these elements can weaken the team’s cohesion, thereby impacting its overall performance and success.
Assess and Build
The world is full of tools and concepts to analyze and develop the composition and the cohesiveness of the team. Here are some of the best ones for each purpose:
Team Composition - Work type preferences
“The Six Types of Working Genius”
The "Working Genius" concept is a model that identifies six different types of work-related talents or geniuses, which are essential for successful teamwork and personal fulfillment.
These six geniuses are: the Genius of Wonder, who questions and explores possibilities; the Genius of Invention, who creates original solutions; the Genius of Discernment, who evaluates and decides on the best course of action; the Genius of Galvanizing, who inspires and drives others forward; the Genius of Enablement, who provides support and assistance; and the Genius of Tenacity, who sees tasks through to completion.
Understanding one’s own geniuses helps individuals and teams maximize their strengths and improve collaboration and productivity.
Team Composition - Personality Types
“The Birkman Method”
The Birkman Method is a personality and perception assessment tool designed to provide insight into individuals’ interpersonal dynamics, motivations, and behaviors in social and occupational contexts. It measures various aspects, including usual behavior, underlying needs, stress behaviors, and interests, offering a comprehensive view of a person's personality.
The method helps in identifying personal strengths, areas for development, and the impact of underlying needs on one’s behavior. Used extensively in organizational development, team building, and career counseling, it assists in improving communication, team dynamics, and personal understanding, ultimately enhancing workplace productivity and personal growth.
Team Cohesiveness
“The Five Dysfunctions of a Team”
An example of a Team Assessment Results
"The Five Dysfunctions of a Team" is a renowned model developed by Patrick Lencioni, aimed at addressing common challenges faced by teams. The model is widely regarded as the gold standard for leadership team integration. The model outlines five interrelated issues that can undermine team effectiveness.
Absence of Trust: This foundational dysfunction occurs when team members are reluctant to be vulnerable within the group. A lack of openness and honesty leads to a failure to build trust, crucial for effective teamwork.
Fear of Conflict: When trust is lacking, teams are incapable of engaging in unfiltered, passionate debate about ideas. Instead, they resort to veiled discussions and guarded comments, stifling constructive conflict necessary for growth.
Lack of Commitment: Without conflict, it is difficult for team members to commit to decisions, as not all opinions and viewpoints are put forward and debated. This lack of clarity and buy-in can result in ambiguity throughout the organization.
Avoidance of Accountability: When teams don't commit to a clear plan of action, holding their members accountable becomes difficult. This avoidance can lead to low standards and poor performance.
Inattention to Results: The ultimate dysfunction occurs when team members put their individual needs (such as ego, career advancement, or recognition) above the collective goals of the team.
Lencioni’s model emphasizes that these dysfunctions are interconnected, often building on one another. The model serves as a powerful framework for understanding and improving team dynamics, encouraging leaders to cultivate trust, engage in healthy conflict, achieve commitment, embrace accountability, and focus on collective results for the team's success
The Coach
A concept like the above-mentioned three are just tools and don’t do much without someone who knows how to use them.
Selecting a Coach/Trainer/Facilitator who has extensive experience in applying the concept is crucial. The value for the team can only be extracted by the deeper involvement and real-life based discussions that an experienced coach can facilitate
How to convince an investor
The benefit of using one of the well-known and recognized concepts, as the ones listed above, is that there is something credible to refer to, including reports and certificates. These should be included in the due diligence package alongside other documentation.
When working with a Team Coach it is good to clarify that in addition to genuinely trying to increase the performance of the team, there is also a need to be able to demonstrate the effort and the follow-up actions the team is committed to for an investor.
Conclusions
When preparing for due diligence, it's crucial to understand that while traditional elements like contracts and financial records are important, they only tell half of the story. The true essence of a company's potential lies in its team – its composition, cohesiveness, and ability to navigate challenges. Diverse work styles and personality traits within the team, coupled with an understanding of each member's strengths and stress triggers, create a dynamic and adaptable unit capable of driving innovation and achieving collective success.
Furthermore, using established models and tools such as "The Six Types of Working Genius," "The Birkman Method," and "The Five Dysfunctions of a Team," can provide a structured approach to understanding and improving these aspects of team dynamics. However, the real value comes from the application of these tools by an experienced coach or facilitator who can translate insights into actionable strategies.
For investors, the evidence of a well-structured, cohesive, and effectively managed team is a strong indicator of a company’s potential for success. Including credible assessments and reports in the due diligence package, along with demonstrating ongoing efforts and commitments to team development, can significantly bolster investor confidence. In essence, the preparedness of a team, in terms of its composition, cohesiveness, and commitment to continuous improvement, is a paramount factor in determining the long-term viability and success of a company.
