Diligence Center: Where Efficient Markets Conquer the Ninth Circle of Contract Hell
Price, Terms, and the Information That Creates Alpha in the Most Opaque Aspect of M&A
I have analyzed technology contracts, tech stacks, and related interdependencies as part of due diligence efforts, both in-house on the corporate development side and for dozens of private equity firms, since 1999. In these 25+ years, surprisingly little has changed about the outcome one seeks when completing diligence (the “how” is another story entirely, and a topic for an entirely different essay).
Diligence as a Spectrum
For a new recruit to a corp dev team, as I once was, or a PE associate, due diligence at first feels like it is all about achieving some level of conviction (i.e., certainty). This includes both certainty of opportunity (e.g., cost reduction) and risk (e.g., contractual). And it also encompasses both relative and absolute opportunity and risk, since some risks you can live with and some you think you can live with but that end up being silent saviors or killers—or, conversely, present themselves as false positives.
In other words, taken together, opportunity and risk are anything that could positively or adversely affect the business but isn’t yet showing up, at least not overtly, in the P&L, the balance sheet, or off-balance sheet. But once you cut your teeth for years on diligence, and see how the real deal world works—especially once you’ve had the chance to get your hands dirty with a business post-transaction and see what you really bought—you realize diligence is really about a spectrum.
Of course, in theory you can sometimes be absolutely sure (one way or the other) on any given item, but historically that certainty comes at a price. For one, if an item “call” is clear to all potential suitors, every party should price it into the transaction, or at least should, making that certainty less comparatively valuable. The Nobel Prize-winning economist Eugene Fama famously wrote in the paper Efficient Capital Markets: A Review of Theory and Empirical Work (1970) that “in an efficient market, prices fully reflect available information.”
Everything Is (Supposedly) in the Price
In other words, as my wife, a former metals trader and now a price analyst and data scientist specializing in both transparent and opaque commodity markets, likes to say: “everything is reflected in the price.” If you believe Fama, as my wife does, then for many investors, even in markets that aren’t entirely liquid, such as sponsor-led efforts with private companies, technical analysis can be as powerful as, or even more powerful than, fundamental (e.g., supply/demand) analysis.
The problem is that the more thinly traded something is (or not traded at all), the less information we have about its price. And if we expand the notion of price to include the two core components of diligence we have previously spoken of—opportunity and risk—we are often dealing in an even more “thinly traded” market environment where the clearing price of a transaction could be very different for one party versus another based on the available information they can glean.
I know it’s not a perfect analogy, but after getting in over ten thousand hours of due diligence “reps” over the years, my M&A philosophy now centers on having the most available information to arrive at a clearing price that reflects more than other parties have. Note that price may be higher or lower than others! But it’s a price that one can stand behind with more conviction because you’ve been able to more accurately size both upside and downside based on the most accurate information available.
Guides Through the Contractual Underworld
This now brings me to Green Cabbage and Diligence Center. I’ve worked with Green Cabbage benchmark datasets long enough to know that those who have access to both price and terms/condition information during a diligence phase—provided there is statistical significance for both in a given market given buyer requirements/nuances and depth of supplier information mapped to them—can better price both the upside and downside of an opportunity.
Personally, I’m more interested in contractual risks (i.e., terms/conditions), especially in technology contracts, because that’s often where the goblins lie. Historically, we could have channeled our inner “deal Dante” in this regard: abandon all hope, ye who enter here! After all, the contractual underworld runs deep, especially in technical contracts that reference not just other documents but even hyperlinks that change over time—absurd, I know—a circle of hell no one wants to enter, lest they never return.
Arriving at accurate pricing benchmarks can be equally daunting, mind you, since most deals are actually somewhat unique (the secret is that making them less unique is when you parse all the individual components and then map them against similar groups of banners with the same demonstrated need). To continue with my Dante analogy, as with contract diligence, it was only possible to get through actual “hell” because the protagonist had a guide.
Diligence Center’s approach uses twelve trained agents to read agreements and map them against billions of individual benchmarks in the GC dataset, comparing good/better/best price bands and terms/conditions to what suppliers have agreed to with others, and risk-scores individual elements to put information in context. The critical difference is that it reads every word of each contract, rather than sampling individual documents or selections within. This matters because those goblins live in the long tail. And on a diligence timeline, there’s rarely a chance to give them anything but a cursory look, let alone the full benchmark workup.
Moreover, Diligence Center reads those increasingly prevalent hyperlinked, referenced agreements through an agent that handles order of precedence, which is critical for untangling the hellish underworld of MSAs, SOWs, order forms, and addenda that collectively govern a relationship, rather than any one piece of paper. From a risk perspective, it includes a system that scores ten specific M&A terms per supplier, each with potential dollar exposure and recommended steps. This includes the basics, like a consent-before-close right for any change of control. It also covers the less obvious ones, like assignment rights that must be confirmed before a carve-out or restructuring can move the contract to a new entity, and exclusivity terms that can quietly undermine your supplier consolidation in a 180-day value creation plan.
And as noted, risk is only one part of the equation. The benchmark dataset now spans 2.6 billion data points, giving an immediate read on whether the target is getting a poor, fair, good, or great deal (across 18K suppliers and nearly 90 categories of spend!) For markets that don’t trade publicly, this represents true price discovery because pricing gaps become cost take-outs one can underwrite before a bid (potentially enabling you to win a deal by going up in price knowing there is an opportunity), and when a target has actually bought well, they let you bid with conviction knowing a limit, given fewer savings opportunities.
Regardless, speed matters in both cases: Diligence Center beta testers saw up to a 96% reduction in deal-analysis cycle time. Huge.
In Conclusion
Fama said everything is reflected in the price. But he never said anyone had read the contracts! To channel my inner M&A due diligence Fama, when certainty is easy to get to and widely shared, the market prices it in, but where conviction is built on information that others lack, that’s where alpha lies, spanning both the buy and the ultimate sell (exit). And that’s why Diligence Center, at least for me, is the most valuable thing we’ve been missing in contract and technical diligence across all my years of M&A.
Jason Busch is an investor, an entrepreneur (founder or co-founder of 6+ businesses), and a Strategic Advisor to Green Cabbage. He previously founded Spend Matters and led its Due Diligence practice. Prior to that, he worked in corporate development at FreeMarkets (acquired by Ariba). He has led or been deeply involved in more than 100 M&A due diligence efforts in his career.