The 40-Hour Due Diligence Rule for Direct Deals

Built on Chapter 11 of The Single Family Office by Richard C. Wilson. Full chapter text: FamilyOffices.com.

One habit separates careful direct investors from the rest. They put real hours into every deal before money moves. My own rule is at least 40 hours of research per direct deal.

That has big implications for how a family office is staffed.

Why more hours pay off

Research on private investors has pointed the same way for a long time. Investors who put more time into diligence tend to earn better results than those who decide quickly.

The gap is not small. Quick decisions often lean on a good pitch and a gut feeling. Longer diligence finds the problems that a pitch is designed to hide.

Two other habits seem to help. Investors who backed industries they knew well did much better. Investors who met with their companies monthly did far better than those who met once or twice a year.

Treat this as a principle, not a promise. More hours do not guarantee a good deal, but too few hours make a bad one far more likely.

The math on your calendar

If one deal needs 40 hours, a single full-time professional can look at about one deal a week. That is it.

Most family offices cannot put someone on deals full time. So they lean on investment banks, other families, and intermediaries to bring them deals. The problem is that this is reactive. Those deals have often been shown to many buyers already.

Families that want better deals usually need a person, or a partner, whose main job is sourcing and checking them.

Make the 40 hours a policy

A formal family office should have a written process that forces at least 40 hours of work before money moves. That includes background checks, reference checks, and fact-gathering.

The point is to stop snap decisions. A great story in a pitch meeting is not diligence.

Some of the best diligence I have seen came from talking to everyone at a company, from the front desk to the board, and then checking what they said. Small facts found that way can change a valuation a lot.

Stage the money

Diligence does not end at the wire. Many families invest in two or three stages, tied to milestones. For example, one tranche up front, another at a working prototype, another at a revenue target.

This keeps the founder focused on goals. It also protects the family if the business fails early.

A simple way to split the 40 hours

Families often ask me what the 40 hours should include. Here is a rough split I have seen work for a mid-sized operating company deal.

About 10 hours on the numbers: financials and customer concentration, plus margins and debt.
About 10 hours on people: management interviews, staff conversations, and references beyond the ones the founder offered.
About 10 hours on the market: talking to customers and competitors, then suppliers.
About 10 hours on terms and the exit: the contract, future rounds, and who might buy the company later.

The exact split will change by industry. The discipline of tracking the hours is what matters most, because it shows when a deal got rushed.

Keep a short diligence log for every deal, with the date, the hours spent, and what was found. Over a few years, that log becomes one of the most useful files in the family office. It shows which kinds of checks found real problems and which ones rarely did.

What to take from this

Set a minimum of 40 hours of diligence per direct deal, in writing.
Count how many deals your team can really review each year.
Hire or partner for sourcing if your team is already stretched.
Release capital in stages tied to milestones.

Questions and answers

How long should due diligence take on a direct deal? I recommend at least 40 hours, as a firm minimum for any direct deal.

Did more diligence lead to better returns? In my experience, yes. More time tends to surface problems before the money is gone.

How many deals can one person review? At 40 hours each, about one a week for a full-time professional.

What else improved results? Investing in industries you know and meeting with portfolio companies often.