How can you evaluate the credibility of information during due diligence?

2 Verify the data

The second step is to verify the data itself, whether it is financial, operational, legal, or market-related. You need to check the data's accuracy, consistency, completeness, and timeliness. For example, you should compare the data with other sources, such as industry benchmarks, peer companies, or historical trends. You should also look for gaps, discrepancies, or anomalies in the data, such as missing documents, inconsistent figures, or unrealistic projections.

3 Evaluate the analysis

The third step is to evaluate the analysis that is based on the data, whether it is done by the target company, a third-party provider, or yourself. You need to check the analysis's validity, logic, assumptions, and conclusions. For example, you should test the analysis's methodology, criteria, and calculations. You should also look for biases, errors, or limitations in the analysis, such as overoptimism, oversimplification, or omission of key factors.

4 Seek feedback

The fourth step is to seek feedback from other sources of information, whether they are internal or external to your private equity firm. You need to consult with experts, advisors, or stakeholders who have relevant knowledge, experience, or insights. For example, you should ask for opinions, recommendations, or warnings from industry analysts, consultants, lawyers, or auditors. You should also look for confirmation, contradiction, or clarification from other sources of information, such as surveys, interviews, or site visits.

5 Apply judgment

The fifth step is to apply your own judgment and critical thinking to the information you have gathered and analyzed. You need to weigh the evidence, balance the risks, and make informed decisions. For example, you should prioritize the most relevant, reliable, and recent information. You should also consider the context, objectives, and implications of the information. You should not rely on a single source of information, but rather cross-check and triangulate multiple sources.

6 Update regularly

The sixth step is to update your information and analysis regularly throughout the due diligence process. You need to monitor the changes, developments, and trends that may affect the target company or the deal. For example, you should track the target company's performance, operations, and reputation. You should also watch out for new opportunities, threats, or regulations in the market or the industry. You should not assume that the information you have is static, but rather dynamic and evolving.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?