Commercial Due Diligence and Private Equity Investments

Due diligence can be a great opportunity to ensure that a private equity investment has a sound growth strategy. This is particularly crucial in a high-multiple market where private equity investors must to show significant growth to hit their internal rate of return hurdle rates.

The most successful private equity firms double-check the information contained within the confidential Information Memorandum (CIM) by asking for specific commercial diligence. This allows them to confirm what is written in the CIM with additional information which can support their Day One Growth Strategy.

Legal due diligence is an essential part of this process, since it confirms that the purchase won’t create the new owner to liabilities that are not anticipated by the previous owner. The legal team will look over the company’s structure including ownership, stock and other information to identify any potential issues.

Physical assets, like facilities, equipment and stock, are scrutinized in the commercial due diligence process. This will ensure that the assets are in good working order and identify any opportunities for improving efficiency or maximizing the utilization of assets. In addition the team will examine documentation on human resources to understand a company’s leadership and its human capital which includes org charts and roles. They will also look through the treasury documents to confirm the amount of shares that have been purchased and look for rights such as debt equity agreements or securities that might give current owners rights that are preemptive. The team will also look at the legal contracts and agreements of a company to identify any obstacles that could prevent future growth or M&A.

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