Emotional Due Diligence – Family Business Life

Q: We talk to key people in the business. Why do we need EDD?

For the same reason I don’t prepare my own taxes. We are professionals at assessing emotional systems. We know what to ask. We know how to ask. We know how to listen. We know what to listen for. We understand what we see. We understand what’s missing. We are perceived as a third party. When you ask questions, the answers are shaped for your ears. Certainly the answers we hear are shaped for our ears, but usually people are more open with us. People like to talk to us. We know how to encourage people to tell their stories, and people like to tell their stories. We know how to position ourselves as people who are serving the interests of both parties, not just yours. We have no stake in the deal one way or another.

Emotional Due Diligence™

by Family Business Life

A tool for understanding and evaluating the family emotional system, before you invest.

THE CRITICAL QUESTION

"In what way will the family dynamics... put our investment at risk?"

OUR ANSWER:

we created Emotional due Diligence™ (EDD)!

Why? Because our clients – investment bankers, mezzanine funds, private equity groups, and family offices – were learning the hard way that their due diligence of family business relationship systems was failing them.

Their assessments were generating unreliable readings and false scores.

They were finding all of this out after the deal was done.

The Truth Behind the Pleasantries

A Family Business Founder/Owner says:

THE Sibling Ownership Group ClAIMS:

The next generation insists:

"We welcome any of your efforts to professionalize the business including bringing in your outside experts."

Pinocchio Risk Score: 3
(before EDD)

After EDD

Real Risk Score: 7

"Sure we’ve had some epic fights but those are behind us; we get along just fine."

Pinocchio Risk Score: 4
(before EDD)

After EDD

Real Risk Score: 7

"No, I’m not disappointed my parents decided to go this route - I just want what’s best for them."

Pinocchio Risk Score: 7
(before EDD)

After EDD

Real Risk Score: 9.9

A Family Business Founder/Owner says:

"We welcome any of your efforts to professionalize the business including bringing in your outside experts."

Pinocchio Risk Score: 3
(before EDD)

After EDD

Real Risk Score: 7

THE Sibling Ownership Group ClAIMS:

"Sure we’ve had some epic fights but those are behind us; we get along just fine."

Pinocchio Risk Score: 4
(before EDD)

After EDD

Real Risk Score: 7

The next generation insists:

"No, I’m not disappointed my parents decided to go this route - I just want what’s best for them."

Pinocchio Risk Score: 7
(before EDD)

After EDD

Real Risk Score: 9.9

– THE COST OF INCOMPLETE DUE DILIGENCE –

Here’s what experience has taught us:

Pinocchio Scale scores between 3-6 don’t result in too much misery when managing the family relationship system

But when scores climb above 7…? Misery becomes your constant companion.

How edd can help:

Knowledge Gaps We Address

History of interaction with outside experts

Especially if there is a long history of sabotaging experts who were smarter than them.

Deep-rooted sibling dynamics and tensions

Observing to get a read on how the family interacts only gets you so far. How do you get to the bottom of ‘cut with a knife thick ‘ tension?

Understanding underlying family dynamics

Hard feelings have a way of lingering when future dreams have been "pulled out from under them..."

Objectivity under deal pressure

Don't underestimate how pressure can shape the answers shared and accepted.

The reality they wanted to see versus the reality that existed

Sometimes its hard to get past the rose-colored glasses without the proper training and support.

Question framing & the impact on responses

How questions are asked can make a huge difference – especially when it comes to emotional family business dynamics.

F.A.Q.

About EDD

What is Emotional Due Diligence (E.D.D.)?

What you’re investing in is not just a business it’s an emotional system. It succeeds or fails not just based on numbers but on relationships in the business. You need to know how that emotional system works.

What you’re creating is not just a deal, it’s an emotional system. Whether it succeeds or fails is not just based on the numbers but on relationships among the dealmakers.

EDD helps you decide: “Should we invest in these people?”

EDD is the process for determining how people and their relationships with one another, impact the leadership, management, operations and culture of the business.

EDD maps out the emotional system that is under the surface, behind the scenes. It identifies the stressors bearing down on the system, the strategies employed by people to reduce their anxiety, and the effects of these strategies on the success of the business – and on the success of the deal!

Why is EDD critical to our decision?

Financial due diligence is no hedge against human behavior – behavior that is controlled by emotions not logical thought.

If you don’t know how emotions dictate their thinking, then you don’t know the people you’re investing in. And if you don’t know them, you don’t know their business.

The financials you’re reviewing cannot answer some critical questions:
Can we work with these people?
Who has the power?
Who are the people who really know what’s going on?
Where’s the friction?
What do people do to make life miserable for those around them?

EDD is critical to your decision to invest or walk away.

We talk to key people in the business. Why do we need EDD?

For the same reason I don’t prepare my own taxes.

We are professionals at assessing emotional systems.

We know what to ask.
We know how to ask.
We know how to listen.
We know what to listen for.
We understand what we see.
We understand what’s missing.

We are perceived as a third party. When you ask questions, the answers are shaped for your ears. Certainly the answers we hear are shaped for our ears, but usually people are more open with us.

People like to talk to us. We know how to encourage people to tell their stories, and people like to tell their stories.
We know how to position ourselves as people who are serving the interests of both parties, not just yours.
We have no stake in the deal one way or another.

What are the steps involved with EDD?

You identify the people in the business (and outside of it) that you would like us to speak with.
You tell us any concerns you have.
We develop a list of questions and the answers we need to get and an approach for getting them.
We interview both the people you identified plus any additional people whose perspective and position can bring the overall picture into focus.
We report to you – both in writing and in person – what we heard, what we didn’t hear and what you need to hear more about.
- Before we give our account to you, we give it to them. This gives them the chance to tell us if we’re on the money or off and if we’re off the chance to explain “why?”
If we have identified problems that you and the people in the business need to address we can propose solutions.