Implementing Decision Gates

Anyone involved in M&A knows how much work goes into getting a deal under LOI, not to mention the amount of work it takes to get a deal to close. In order to allocate this much time and effort, a degree of certainty in the potential investment is required. But without easy access to insider information, how can this certainty be achieved? A good first step is to focus on what the success of the deal hinges upon and implement the decision gates framework to prioritize diligence topics.

Usually, the success of an investment boils down to just a few important issues.  The difficulty is that it is not always clear which of those issues are most important, so identifying the most critical pillars of the investment decision is a good place to start. The underpinning or pillars of the investment thesis are often the key decision gate items. Force ranking diligence issues to tackle them serially rather than simultaneously is instructive and beneficial in determining prioritization.

Decision gates help create natural check-ins for prioritized decision making. In other words, if validating a major customer’s contract renewal is most important to the investment thesis, then that item should be the first decision gate. Topics of lesser importance should only be started or worked on once a sufficient level of clarity or comfort on the primary issue has been achieved. Decision gates focus on issues that are deal killers and deal makers—the items that drive the go vs. no-go investment decision.

Whether you are a principal investor or some type of M&A or diligence advisor, it is critical to understand the investment thesis. This allows you to build a strong filter to help screen deals throughout the process. This is what the diligence process is for—to test that the core tenants or pillars of what you as the buyer have been told is true and to validate those most critical to your investment thesis, thus improving the odds that you make money on the deal.

To learn more about the Decision Gates framework and how to apply it in your workflows, check out our free course on Turning Decision Gates into Diligence Plans.