Soft due diligence in food and agribusiness M&A success
Mergers and acquisitions (M&A) have become increasingly prevalent in the food and agribusiness sector. However, the success of these transactions hinges on a thorough and comprehensive due diligence process. While traditional “hard” due diligence, which focuses on the financial and legal aspects of the business, is essential, in many cases it is not sufficient enough.
Soft due diligence, which encompasses cultural, technical, commercial, and operational factors, is a critical component of successful M&As. This is particularly true in the food and agribusiness sector, where success often relies on the skills, experience, and ability of the workforce. For this reason, acquiring companies must closely consider soft due diligence factors, such as management expertise, organisational structure, market dynamics and supply chain relationships, when acquiring new entities.
The importance of a comprehensive approach to due diligence
Traditionally, the due diligence process has focused on the “hard” aspects of a target company, such as financial statements, legal contracts, and intellectual property. While these factors are undoubtedly important, they provide limited insight into the company’s future potential and risks. Soft due diligence, on the other hand, encompasses many of the intangible but vital elements of a target company that hard due diligence might overlook. These include the company’s culture, the expertise of its management team, its organisational structure, and its supply chain relationships. By integrating these soft factors into the due diligence process, acquirers can gain a more comprehensive understanding of the target company’s true value and potential.
When evaluating soft factors, it is crucial to be aware of their interconnectedness and the need to evaluate them holistically. For instance, a company’s organisational culture can significantly impact its ability to adopt new technologies or adapt to market changes. Similarly, the quality of a company’s supply chain relationships can affect its operational efficiency and competitive position. By considering how these factors interact and influence one another, acquirers can develop a more nuanced understanding of the target company’s strengths and weaknesses. This kind of evaluation can reveal underlying issues or advantages that might not be apparent when examining each factor in isolation.
Given that each M&A transaction is unique, with its own set of challenges and opportunities, the soft due diligence process must be adapted to the specific context and strategic objectives of the deal. Acquirers should prioritise the soft due diligence factors that are most relevant to achieving their goals, whether that be expanding market share, acquiring new technologies, or enhancing operational efficiency.
The impact of soft factors on future performance
Soft due diligence factors, such as management expertise, organisational structure, market dynamics, and supply chain relationships are key determinants of future value creation and success. It stands to reason that well-structured companies with a strong, experienced management team are more likely to navigate post-merger challenges more readily. Similarly, companies with robust supply chains and a solid market position are better positioned to capitalise on synergies and expand their market share.
By conducting a thorough soft due diligence analysis, buyers can gain a deeper understanding of the target company’s operational capabilities, market dynamics, and human capital. The insights from this analysis can enhance the buyer’s negotiation position by highlighting key strengths and weaknesses. Additionally, it can help identify best practices and growth opportunities, which can be developed into robust post-merger strategies.
Key components of soft due diligence
Key areas of soft due diligence include:
Assessing human capital: The workforce is the backbone of any business, and this is especially true in the agribusiness sector, which relies heavily on skilled labour and management. Evaluating human capital involves assessing the capabilities, productivity, and alignment of the workforce with the company’s strategic goals.
Assessors will also need to develop an understanding of the skills and productivity levels of the workforce and identify any gaps that might hinder operational efficiency. This may be achieved through performance data analysis, employee surveys, and direct observations. The goal is to ensure that the workforce can support future growth. The assessors will also need to gauge whether the workforce is aligned with the company’s strategic objectives, as misalignment can undermine post-merger integration efforts.
Evaluating leadership and management effectiveness: Leadership assessment focuses on identifying key leaders and evaluating their impact on the organisation. As part of this process the assessors will need to evaluate the leadership team’s past performance, management style, and their ability to guide the company through transitions and ensure strategic objectives are met. Leadership assessments focus on identifying key leaders and evaluating their impact on the organisation.
They involve assessing the competencies, decision-making abilities, and leadership styles of key leaders. Tools such as 360-degree feedback and leadership competency frameworks can provide valuable insights at this stage. As part of the leadership assessment, it is also important to evaluate the existing succession plans to ensure that there are no leadership gaps that could jeopardise the company’s future.
Corporate culture analysis: Corporate culture encompasses the values, norms, and practices that characterise an organisation. A thorough analysis of corporate culture can reveal whether the target company’s culture aligns with that of the acquiring company. Cultural compatibility is a critical factor in successful post-merger integration and value creation as organisational, national, and professional cultural differences can undermine the potential synergies of any merger.
Corporate culture analysis involves assessing these differences and identifying potential challenges and opportunities for leveraging cultural synergies. Cultural audits and employee feedback can provide deep insights into the target company’s employee satisfaction levels, culture, work environment and organisational climate and provide insights into how employees interact, make decisions, and handle conflicts.
Conclusion
Soft due diligence is a critical component of successful M&As in the food and agribusiness sector. By taking a comprehensive approach that considers cultural, technical, commercial, and operational factors alongside traditional due diligence components, acquirers can gain a more complete understanding of the target company’s future potential and risks.
Companies considering M&As in the food and agribusiness sector should prioritise soft due diligence as an essential part of their transaction process. By allocating sufficient resources and attention to assessing the target company’s soft factors, acquirers can increase the likelihood of a successful merger and position themselves for long-term growth and value creation.
Engaging industry-specific expertise
The food and agribusiness sector faces unique challenges and dynamics. Conducting effective soft due diligence in this sector requires specialised knowledge and understanding of these issues. Engaging experts with sector-specific experience can provide invaluable insights into the target company’s competitive position, market potential, and operational capabilities.
At Farrelly Mitchell, our commercial experts have decades of experience in delivering thorough technical, commercial, operational, and ESG due diligence for our clients. Through our unrivalled regional and sector knowledge, we can provide quick, discreet, and unbiased assessments of any investment, merger, or acquisition to ensure that you move forward with a complete understanding of your target. To learn more, contact us today.
