areas of due diligence Private Equity firms often look at specific aspects of Target companies.
commercial Financial legal HR and Technical while these are analyzed in isolation Together they give a complete view of the Target business.
The main goal of commercial due diligence is the better understand the company's business model and explore how the Company addresses the needs of its customers.
capitalizes on key industry Trends and navigates the competitive landscape This is typically conducted in conjunction with Consultants that prepare Market studies.
competitive benchmarking and future Trends analyzes management is also a vital source of information this can include the analysis of systems and infrastructure supporting a target's operations.
Examples of red flags from commercial due diligence could be shrinking Market size and declining market share.
disruptive or commoditization threats Or customer or supplier over dependence.
Financial due diligence involves a detailed analysis of historical and projected financials.
This is normally done using an accounting firm engaged to thoroughly examine audited historical financial statements normally going back three to five years.
budget performance current performance and projections CFOs and financial controllers of the target are also key contributors of information.
The analysis of current performance is important as it is the most recent measure of a company's Financial Health.
I will include assessing the cash flow position of the target for valuation purposes.
This will be done in part by normalizing or calculating recurring operational earnings adjusted or normalized a bitter.
and calculating minimum working capital positions other items are set will be taxes the current financing structure.
treasury measures contingent liabilities pensions and Provisions examples of red flags would be off balance sheet Financial liabilities such as loan commitments or derivatives.
weakening working capital trends or accounting adjustments to improve reported performance.
During legal due diligence deal teams review a targets material legal documentation and assess the legal status of its key stakeholders.
Law firms are mandated by the private Equity Firm to do an extensive review of corporate records such as filed regulatory records material corporate and employee agreements and intellectual property rights.
Environmental social and governance issues contractual obligations and litigations are also examined to determine potential cash flow or balance sheet impacts.
Background checks on current owners and top management are carried out to assess counterparties and reveal any misconduct.
In addition some legal due diligence will also provide legal and Regulatory guidelines that are important in the sector or geographies where the target operates.
The work coming out of legal due diligence will be used directly in the negotiation of terms and conditions relating to the Assumption of risk and exposure when drafting the shared purchase agreement.
And to some extent the agreements with financial parties such as the credit agreement.
Human resources or HR due diligence involves a thorough review of the capabilities of key employees at the Target starting with the management team.
This due diligence is normally done by the private Equity professionals and external Consultants. Hired to assist in the process.
Recruitment agents are often used to provide further details on employees.
A strong management team is a crucial driver of both investment performance and value creation post investment.
The cohesion of the team and the impact of each team member on the company's operational performance and success are closely evaluated.
Analyzing the management team gives a view on the target's culture and core values and may reveal early on when changes in or additions to the team are required.
Beyond senior Executives, HR due diligence extends to line managers and other key employees at the Target.
other items assessed include Recruitment and Retention programs Employment contracts compensation and benefit programs examples of red flags would be frequent board changes.
Incentive plans that are not aligned with the private Equity firm's time horizon or business plan.
Or overly strong loyalty to existing owners.
Or a strong dislike to changing ownership.
Technical due diligence is a generic term for any form of specialized due diligence work needed.
This relates more to Specialty companies and specialized parts of companies such as high tech engineering software Actuarial work or even site visits for Real Estate or infrastructure related Investments.
Here advisors that are specialists in their fields will be hired to conduct due diligence at the Target and also to explain what the risks may be for the investor.
This due diligence area is becoming more and more relevant as businesses and the private Equity firms that chase them become more specialized.
