Case Study: End-to-End Due Diligence Enabling a Confident Strategic Investment
Background on Due Diligence Case Study
A mid-sized investment was evaluating a possible purchase of a privately owned firm that was in a regulated and competitive market. The target business had a strong growth story, which was backed by rising revenues, a base of loyal customers, and good market share. The management projections indicated that there were more expansion prospects and therefore the transaction was strategically appealing to the investor.
But like most private-market deals the data presented to the investor was the financial statements prepared by the management and top-level operational summaries. Since the investment under consideration was rather large, and the strategic prospects of the target were long-term, the client needed to have the target financial performance, risk, and operational readiness validated independently. To support a time-constrained decision-making process, the investor engaged our team to conduct a thorough due diligence review, enabling stakeholders to Learn Financial Due Diligence Reporting through practical, real-world analysis.
Issues and Challenges
This client had a number of interrelated problems that occur in the instances of private equity, strategic investment, and acquisition. Although financial position of the target company was seen to be strong, lack of transparency was in place to comprehensively evaluate quality and sustainability of earnings. The revenue was found to be concentrated on few customers, which created an issue of stability of the revenues in case of any alteration of key relationships.
Besides, the target also worked under a regulated environment, which posed a risk of exposure to compliance and governance risks. Paper work associated with regulatory submission, company policies, and control strategies were spread out and it was hard to determine whether the existing practices were appropriate or not in accordance with regulatory requirements. Of special concern to the client was the possibility of compliance gaps leading to penalties or disruption of business in future or reputational loss.
The target had expanded at a high rate operationally, and its internal processes and controls had not kept pace. Management reporting was extensively qualitative, internal control informal in some quarters and scalability to size beyond the present level of operation had not been examined. All these caused doubt on whether they could have projected growth without substantial investment or restructuring of operations.
Altogether, these issues posed risk to valuations, deal structure, and investment committee approval. The client had to be certain about the risks that they could manage, those that they had to fix now, and those that could have a significant impact on the appeal of the transaction.
Objectives
The main goal of the engagement was to give the client an independent, clear, and evidence-based evaluation of the target business. The due diligence was to be used in order to make an informed investment decision, position the negotiation and the likelihood of post-transaction surprises.
In particular, the client wanted to:
- Bearing out the accuracy and maintenance of reported financial performance.
- Determine material legal, regulatory and compliance risks.
- Evaluate operation maturity, internal controls and scalability.
- Compare business placement and prospects of sustainable expansion.
- Present the findings into practice deal structuring and post-acquisition planning.
The client needed a technically sound and decision-ready due diligence product, which can be utilized in the internal governance and approval systems.
How We Helped
We implemented a unique, multi-disciplinary due diligence model, which was in accordance with the investment goals, transaction time, and the riskiness preferred by the client. We were risk-based and considered those areas as most probable ones to impact valuation and deal determinacy as well as post-investment results.
On the financial due diligence aspect, we have done a thorough financial statement analysis of the past financial statements, revenue structure, cost structure, and margin pattern. Special focus was given on earnings quality, normalization adjustments, working capital behavior and cash flow sustainability. We also went through budgeting and forecasting processes and evaluated the reliability of management projections.
Simultaneously, we conducted acompliance analysis of key contracts, regulatory requirements, governance and internal policies. This involved the evaluation of exposure created by customer and supplier contracts, possible gaps of compliance and how well the oversight systems are sufficient in a controlled operating environment.
Operational and commercial due diligence investigated management capability, decision making processes, customer concentration, competitive forces and scalability. To get some feel of how the business was functioning on the ground and to challenge the assumptions that formed part of future growth strategies, we conducted management interviews.
During the engagement, we were in constant touch with the client, making periodical updates, identifying new challenges, and discussing possible effects on the deal structure and negotiation strategy. This participatory methodology helped make sure that the findings were framed and practical as opposed to being diagnostic.
Value Delivered
Such involvement proved the strategic importance of due diligence, not only in the process of identifying risks. Our due diligence services allowed the client to minimize uncertainty, enhance deal certainty, and safeguard long-term investment value by converting complicated financial, legal and operational information into simple, decision-driven information.
Finally, the engagement strengthened the role of due diligence as a key pillar in making sure decisions are made with confidence, investments made disciplinarily and sustainably, and growth realized.[/vc_column_text][/vc_column][/vc_row]