How Private Equity Due Diligence Can Make or Break Your Next Acquisition

Ask anyone in the business world, and they will tell you that mergers and acquisitions are no easy feat; after all, there are many things to consider. And a savvy investor will likely want to know before the deal is finalized the probability for success. To that point, you’re encouraged to thoroughly vet the company you’re interested in acquiring, which means taking a close look at the prospective company’s financial records. In the corporate world, this process is referred to as private equity due diligence, a detailed review of a company’s solvency and capacity to maintain profitability.

It should be noted that this task is one that it is typically outsourced to companies like Corporate Resolutions, for example. If you’re not already familiar with Corporate Resolutions, it is a firm predicated on providing business investigations and consulting services to financial institutions and other corporations in the U.S. and internationally, with a focus on private equity due diligence. The remainder of this article will be dedicated to detailing three of the more critical components of successful private equity due diligence:

  1. Always dig deeper
  2. Focus on people
  3. Avoid rushing

Why You Should Always Dig Deeper

So what does it mean to “dig deeper,” in the context of private equity due diligence? It means don’t stop at the surface, relying only on financial analysis and conversations you’ve had with senior leadership. This is where research often ends for an overwhelming majority of mergers and acquisitions when, in fact, it should just be the beginning. If we have your attention so far, keep reading as it gets better from here.

Of course, these surface-level investigations are great for providing a snapshot of a company, but relying on financial records and interviews with those in senior leadership positions gives you only half of the story. This is akin to reading the preface of a book, expecting to know how the story will unfold. So if speaking with C-level executives and going over company financial data is not enough, what else should you be doing? You may want to consider

  • Interviewing company employees, from entry level all the way up to those in C-level roles.
  • Sending multiple functional are experts to assess every nuance of the prospective company.
  • Taking a look at the company’s capacity to attract and retain customers.
  • Lastly, taking time to examine performance management and day to day operations.

Why Focusing On People Is Important

While embarking on the journey towards a merger or acquisition, people are often thought of as just part of the process, but the people that work in an organization play a vital role in the company’s success or failure. Let’s face it, the end-goal of most mergers and acquisitions is to be profitable. The ability to achieve such a goal hinges on having the right people in the right positions.

This is especially true when it comes to those in leadership roles; after all, it’s a tremendous undertaking to bring in new people who may not be as well-versed in company culture compared to someone who has been there for years. Having said that, you can also expect a fair share of attrition; studies have shown that employee disengagement increases by 23% after a merger/acquisition.

Therefore, you’re encouraged to have a plan in place to retain and attract new employees if needed. How do you know if a prospective company has the caliber of employees needed to make your merger/acquisition a truly transformational experience? It comes down to engaging with people in roles that are most critical to the company’s success, which includes HR, financial management, strategic planning, and marketing departments.

Don’t Rush The Process

If you have ever been part of a merger or acquisition, you can appreciate how fast things can move at times, but there is something to be said for taking a little more time and looking closely at all aspects of the deal. After all, there is a lot at stake here; you’ll want to consider not only the livelihood of the employees but also profitability. It’s important to think of private equity due diligence like researching a product before purchasing it; you’ll want to be as informed as possible before making an investment decision.