Due diligence is essential to identify the risks, accurately assess investments, and align investments with strategic goals. The investment process can be complex depending on whether you’re a private equity company looking to acquire companies, or an operating partner. It involves gathering a range of information regarding the legal, finance and IT aspects and operational processes.
PE firms aren’t just concerned about the bottom line, they seek to improve operations and enhance the value of a business before it exits, which means an extensive study of day-today management and operational processes. In addition to the usual due diligence on financials PE firms typically carry out a range of additional research during the DD process: -Industry analysis which includes understanding trends in the industry, future trends, assessing the company’s standing within the industry, etc. Analysis of the most important industry ratios such as working capital cycle, debt/equity ratio, etc. Examining recent industry transactions and their multiples
Legal due diligence: checking contracts and compliance with regulations, pending litigations, etc.
It is also crucial to determine the potential to accelerate the growth of the company in question by taking on other companies or assets and integrate them into its operations. This will impact the performance and value of the target company following the acquisition. This analysis includes a thorough review of the target company’s competitive landscape and customer base, as well as the possibility and feasibility of acquiring new customers/partnerships to speed up growth.
