due diligence What do we mean by due diligence? Simply put due diligence in a private Equity acquisition is the work carried out by an investor that allows them to understand and evaluate a Target.
This is one of the most important tasks in private Equity as it.
Allows investors to form and validate their investment thesis including a business plan and valuation.
Verifies that the target is genuine and really exists as it is described often referred to as kicking the tires.
Allows the buyer to familiarize itself with the target before accepting to control it.
Serves as a basis for legal protection post-transaction.
For example warranties or indemnities around existing litigations or other pre-deal risks? Allows financing parties to provide Capital by giving them an understanding of what they are lending against.
And allows the relationship building between the potential new owner and the continuing management team.
Without due diligence a deal cannot take place as you do not know what is being acquired.
During this process the private Equity Firm explores all material aspects relating to the targets with the objective of developing a robust understanding of its strengths and weaknesses to arrive at a decision to invest or not.
And to reveal specific areas that require negotiation.
Due diligence is a time-consuming resource intensive process the places significant Demand on lean teams within the private Equity Firm.
It is therefore important to initiate due diligence on serious opportunities only.
And to limit the scope on initial due diligence to questions that the material to a go. No go decision.
From a vendor's perspective the better the due diligence provided in the form of documentation data rooms meetings with advisors and management.
The more likely that the deal will go through.
And the less likely that the final sale price will change during negotiations.
In addition sellers have an incentive to fully disclose all known and material risks to bidders to avoid any potential post transaction litigations or liabilities.
