By Jim Morozzi
Diligence has a way of finding the small cracks in a company’s foundation. Issues that seem manageable during the normal course of business can take on greater significance when a buyer begins looking closely. Left unaddressed, those vulnerabilities can raise questions about the strength, scalability, and long-term value of the business.
In my experience as a CEO and board director, boards should identify these issues well before a transaction is on the horizon. The goal is to avoid surprises. When a significant issue surfaces during diligence, the immediate question from the other party is often, “What else don’t I know?”
That can affect trust as well as the transaction itself. An unexpected vulnerability can become a negotiating point around price, terms, or other conditions. Addressing risks earlier gives the company time to strengthen the business and demonstrate that management and the board understand and are actively managing areas of exposure.
These five questions can help boards surface those risks early.
1. Where are we overly dependent?
Concentration risk can develop around customers, suppliers, products, or key individuals, and it can leave a company more exposed than its overall performance might suggest.
On the customer side, my rule of thumb is about 20%. When a single customer represents 20% or more of revenue, that relationship deserves closer attention. A change in leadership, purchasing strategy, or business priorities at that customer could have a meaningful negative impact on the company.
The direction of the relationship matters as well. Renewals and expanding business can provide confidence that the relationship remains strong, while declining activity or fewer new contracts can be an early warning sign.
Supplier concentration creates a similar exposure. Heavy reliance on one provider can become a significant problem if that supplier experiences an operational disruption, technology failure, or significant pricing change.
The board should have a clear view of where these concentrations exist, how much risk they create, and whether management has credible plans to reduce or manage that exposure.
2. What would break if we doubled in size tomorrow?
When companies grow quickly, I often see the first stress cracks around customer fulfillment and service.
Before the company enters its next stage of growth, I would ask questions to determine whether the people, processes, systems, and capital plans can support the additional demand:
- Can you still get the product out the door?
- Can you continue delivering the service customers expect?
- Can you maintain quality while handling substantially more volume?
One way to pressure-test that is to look backward. How the company handled its last growth spurt tells you a lot: where it stumbled, and what leadership learned from it.
Then challenge the leadership team to think through how the business will handle that next stage of growth. In the businesses I led, we would also plan for what could happen if a new product, service, or initiative did not perform as expected. Growth requires the same discipline: anticipate where pressure may emerge and have a plan for how the organization will respond.
3. Are we measuring performance or simply reporting results?
Too many companies rely on financial results as the main measure of how the business is performing. Those numbers are important, but they mostly tell the story of what has already happened. Boards also need to understand what is happening inside the business today and what that could mean for future results.
That requires looking beyond the financial statements. Productivity, order fulfillment, customer service, workplace safety, and employee retention can all provide useful signs of how well the business is operating.
The sales pipeline is another important indicator. A company may be hitting its revenue targets today, but the board should understand whether new opportunities are continuing to enter the pipeline, whether the business is attracting new customers, and whether potential sales are moving forward at a healthy pace.
I view financial results as the scorecard. The measures behind those results help explain what is driving performance and give the board a better sense of what may be coming next.
4. What genuinely differentiates us from competitors?
Boards should be willing to challenge assumptions about competitive advantage. A company may believe its technology, service delivery, distribution channels, or reputation sets it apart, but the real test is how difficult that advantage would be for a competitor to replicate.
A well-capitalized new entrant can change the competitive landscape quickly. The board should understand how much time, investment, and capability a competitor would need to match what the company offers. The easier that advantage is to reproduce, the more vulnerable the company may be.
Customer behavior can help validate whether the differentiation is meaningful. A willingness to pay a premium, sustained demand, and a healthy sales backlog are signs that customers see value in what the company does differently.
Ultimately, the board needs to determine whether the company has built an advantage that can stand the test of time. As I like to put it: Are we just lucky, or are we good at doing this thing?
5. Could this business sustain performance without its founder or key executives?
This is an important question for any board.
If one person holds all the major customer relationships, regulatory relationships, or business development capabilities, the company has a risk that needs to be addressed.
Companies should conduct formal annual risk assessments, develop mitigation plans, and have the board review progress quarterly. Loss of key personnel should be part of that process.
I would also look at least two levels below the senior leadership team. That is where you begin to see the company’s real bench strength. Who could step into a larger role with the right development? What experience or competencies do they still need?
Building that depth takes intention and time, which is why it should begin long before a loss of key employees or a transaction that is on the horizon.
Ask What Could Go Wrong
If these five questions expose several vulnerabilities, I would start by addressing the operational risks. In most businesses, strong execution of the fundamentals supports everything else.
From my own experience, I have also learned the value of deliberately asking: What is going to go wrong?
When considering an acquisition, there is a natural tendency to focus heavily on the upsides. That optimism needs to be balanced with a clear assessment of where the plan could fall short, how significant the impact could be, and what the company would do in response.
This kind of scrutiny is valuable before diligence begins. Regardless of how well a company is performing, there are always areas that can be strengthened. Identifying those vulnerabilities early gives the board and leadership team the opportunity to address them on their own terms, rather than having a buyer, competitor, or unexpected event expose them later.
Even the strongest companies have opportunities to improve. The goal is to identify those areas early and address them before they become larger vulnerabilities.
Author Bio
Jim Morozzi is a seasoned CEO and board director with deep experience in strategy, operations, finance, and enterprise risk management. He has led multiple telecommunications companies through growth and transformation, most recently serving as President and CEO of DQE Communications through its successful sale to private equity owners.
Throughout his career, Jim has focused on strategic planning, operational effectiveness, P&L optimization, capital allocation, M&A, and talent and succession planning. As an ELAB Advisor, he draws on his experience on both sides of the boardroom table to help CEOs identify risk, strengthen operations, align performance measures and incentives, and prepare their organizations for growth and strategic transitions.