Virtual due diligence

COVID-19 made life challenging for business – and for advisers – but it’s also provided an opportunity to fully test the benefits of virtual due diligence: video calls; drone technology; online meetings; and collaboration tools. Data analytic tools have become even more important. Vicky Meek reports

When the COVID-19 pandemic first hit the UK in February 2020, few would have believed that we’d still be living restricted lives more than 15 months later. And fewer still would have predicted that, despite this, deal making would be so busy. According to Refinitiv, M&A with UK involvement in Q1 2021 reached the highest volume in this period since 2007, at 1,222 deals; by value, at $120.9bn, it was 16% higher than the same period in 2020. And all this happened while the UK had been living under some of the toughest restrictions on the planet.

Due diligence teams across the UK have clearly been exceptionally busy. But how have they managed this throughout a period when travel has been all but banned?

“We’ve worked remotely on almost every transaction,” observes Jon Stubbings, transaction services partner at Grant Thornton. “That’s been the biggest change – no big in-person kick-off meetings and virtually no site visits.”

No entry

As with nearly every other office-based activity, due diligence has become pretty much 100% virtual, with client, bidder and team meetings all conducted on video calls.

Meanwhile, the parts of the process reliant on travel, such as factory floor tours or visits to warehouses in order to check inventory or other assets, have often either had to be entirely removed from the scope of due diligence work or severely cut back, with drone technology employed instead, if appropriate. This has caused some challenges.

Kirsty Sandwell, partner and head of transactions at RSM, says: “The functional part of the deal – the process – has been enhanced by these new tools. Arranging weekly deal meetings with 10 people was difficult and conference calls with any more than a couple of people are a nightmare to manage. Clients can see it’s inefficient to have all those people visit, for them and the adviser.”

Overall, transaction services professionals found the shift to virtual processes far less painful than they might have expected. Mark Diffey, a transaction services partner at Deloitte, says: “I’ve been surprised how well it has worked. We’d normally sit in clients’ offices for vendor due diligence work, for example, but we’ve been able to carry out this often complex work remotely.”

Aside from the now-ubiquitous video calling technology, among the biggest enablers of remote due diligence have been collaboration tools. While most firms and many companies had already begun using these to some extent, they have really come into their own since the start of the pandemic.

Dan Rosinke, a partner at Grant Thornton, explains: “It’s been a while since we relied on faxes and different coloured pens to share and mark up documents, but not everyone was using the newer tools available. The pandemic forced everyone to collaborate online out of necessity. Now, everyone can be working on the same document at the same time and mark it up live.”

There are other efficiencies, too. He adds that remote working allows more frequent, more focused online meetings with management teams and real-time partner reviews, which enable early identification of issues.

Cause and effect

Clearly, understanding the effect of the pandemic on targets has been one of the biggest streams of due diligence work over the past year. “Setting the right scope can be quite a challenge,” says Dave Riley, a partner at Crowe. “While some of COVID-19’s impacts can be quite obvious, it can be difficult to understand how permanent any effect will be – both positive and negative.”

This can mean having to dig deeper and more broadly. “We are looking further ahead and going at least one step beyond the immediate business performance in our analysis,” says Riley. “We need to look very closely at the current and future impact on the end customers, on a month-by-month basis and across different scenarios.”

As a result, data analytics tools have become even more important. Rosinke explains: “If we really want to understand how the numbers stack up at a time of significant uncertainty, especially in the absence of site visits, we have to redouble our efforts on data analytics,” says Rosinke. “It’s not always possible to get perfect information, but today, we need to be able to triangulate lots of different data to answer all the relevant questions.”

It’s no coincidence that firms such as mnAI and MarktoMarket – both providers of sophisticated data platforms and analysis tools – have joined the Corporate Finance Faculty in the past year.

Staff support

It’s clear that the restrictions put in place have permanently changed the way people work, and due diligence providers will be keen to retain as many of the more efficient practices as possible. Some form of remote working, virtual meetings and online collaboration are evidently here to stay, as big firms such as KPMG and Deloitte have announced reduced office time for staff.

For many teams, the biggest issue will be how to navigate their way around the new work methods on a more permanent footing. The pressure of deal processes has always meant that work often spills over well into personal time. That can be more of a challenge when working from home.

Mix and match approach

“We want to hold on to the aspects that have increased efficiency,” says Rosinke. “And we believe it’s more inclusive to have people able to work from home some of the time. But we recognise that work/home lives have a tendency to be more blurred if you’re working remotely, so we will need to find ways of addressing this.”

Deloitte’s Diffey agrees: “We really need to be mindful of the impact an ‘always on’ way of working has on mental health,” he says. “We need to find the right balance between supporting our clients and supporting our people in what is a highly demanding market environment.”

When they can resume, face-to-face meetings – both formal and informal rapport-building – will be welcomed. “Some of the most interesting conversations between buyers and management teams happen informally,” says Diffey. “Having fireside chats or talking over dinner forges relationships and helps build trust.”

This will ease the inevitable difficult conversations that often need to happen between the different parties to a transaction, or advisers working on it. “It’s hard to catch nuances when you’re screen-based,” says Rosinke. The firm recently worked on a project where “some difficult negotiations took several attempts to resolve and frustrated the process”, he says. “If we’d been able to get everyone round the table, it would’ve been quicker and more productive.”

Site visits and factory tours will also return, given the importance of seeing stock levels up close, how space is being used or could be used, or how buildings are being maintained.

The personal touch

“Visits prompt a lot of questions and you pick up a great deal of information from the person showing you round,” says Riley. However, most believe the days of extensive travel are over, with a likely pattern of in-person meetings at key points and virtual calls in between, which have often proved easier to arrange than physical meetings.

Stubbings explains: “We want to get back to building relationships with clients and getting to know a business by really seeing how it works. It’s not just more effective, it’s one of the most enjoyable parts of the job.”

RSM’s Sandwell says they are preparing for the new norm. “We have been developing new training in-house on how to get the most from working in a Teams environment – how to pitch say, or how to control a meeting,” she adds. “It’s here to stay, and so we’re having to learn new skills.”

Diligence at a distance

Rentokil Initial clocked up 23 acquisitions in 2020. The acquired businesses brought the group additional annualised revenues of more than £150m. The cash spend was £180m (of which £150m was in the second half). Chris Hunt, Rentokil head of M&A, who’s also a member of the Corporate Finance Faculty’s board, gives a trade acquirer’s view of due diligence in a COVID-19 and post-COVID-19 world.


“After a strong Q1 last year, we decided to pause M&A during Q2 so we could focus on preserving cash. A year ago, it would have been hard to envisage doing deals in H2, but it actually became clear pretty quickly that overall our business was resilient to COVID-19, so we resumed activity.

“The process didn’t change significantly for us – we’ve been using virtual communications for more than five years now. A large volume of our smaller transactions are mostly outside the UK. Our colleagues in the relevant countries tend to carry out the due diligence and we have made our M&A process largely modular and replicable.

“We encourage sellers to populate the bulk of the dataroom and we are asking for information around the impact of COVID-19. We try to understand the impact on the ultimate customer base. Will they require our services when they reopen, or are they gone for good?

“The pandemic has forced sellers to have greater familiarity with a virtual process, and this has added some efficiency as we’re not flying out to see businesses and meet sellers. But we have definitely missed the personal element. Normally, we would try to build a rapport with sellers and establish trust, but video calls tend to be quite transactional.

“This means we might be more efficient at the early deal stages, but without that rapport ‘in the room’, resolving deal issues takes longer. You can tell a lot about the quality of a services business just by being among its people. We often do deals in new territories and it’s very difficult to get a read of a small business in Lahore or Lagos without visiting it. While we’ve found it’s not essential, it can affect the mood music around a deal.

“We’ve also completed some sales and we’ve found the process more efficient on that side. Previously, we’d have dragged the management team to meet a variety of bidders. Now, we allocate an hour or so to each for a virtual meeting.

“Through all this, we’ve learned that the default shouldn’t be to hop on to a plane. Face-to-face meetings will probably take place at the beginning and end of the process, but in-between, virtual meetings work fine.

“The danger is that we suck the joy out of deals and turn them into a process. Many who work in deal environments get energy from meeting others and working late nights together in teams; you don’t get that from a screen.”

Sell-side view

Vendor due diligence (VDD) work was already on the increase well before the pandemic, yet it has become an essential part of the M&A process over the past year. In particular, it helps potential buyers better understand the impact of COVID-19 on a business before embarking on their own due diligence.

“VDD has become more valuable in the current environment,” says Dave Riley of Crowe. “Because there has been such uncertainty over the past 12 months, working on these assignments has really sharpened minds about the focus of our report and how it is presented.”

Grant Thornton’s Jon Stubbings agrees. “This has shone a light on the real value of understanding the robustness of the numbers,” he says. “There is so much ‘noise’ and difficulty analysing them, especially as businesses have been affected differently. How do you set a number on which to price a business, when there is such a wide range of potential answers?”

It is also helping to bridge the gap between buyers and sellers at a time when they can’t meet in person. Deloitte’s Mark Diffey says: “VDD has become very important when there is no face-to-face time. It allows complex concepts to be communicated to buyers – and they only have to be explained once to us rather than multiple times in a series of meetings.”
And this may be an area of due diligence that benefits considerably from the pandemic, as VDD is now being carried out even on smaller businesses, and as its value is increasingly being recognised.

“There’s been a real focus on the quality of work and how you have arrived at the numbers – it has been incredibly interesting from a purist’s technical perspective,” says Stubbings.