Staying Competitive in Tough P.E. Market: Build a Strong Due Diligence Process


This is the second blog in the series “Staying Competitive in a Tough Private Equity Market.” The first post in the series provided recommendations of essential elements that private equity firms should implement to stay competitive. We will focus on our first recommendation: Create a strong due diligence process.

The due diligence process will inevitably vary for each acquisition. However, at a general level, there should be a level of consistency to the elements of the process that become repeatable for every transaction. These elements should be efficient and effective at providing the desired outcome.

Among the consequences of lacking strong processes are unreliable assessments, incomplete information, overvaluations, and failure to uncover liability risks.

Core and Special Teams– Establish core teams of professionals to cover all aspects of the due diligence process: Legal, business & industry, tax, finance & accounting, human resources, and marketing professionals (this is a sample list, modify as applicable for your needs). Each team should have a team leader that is accountable for the team’s deliverables and ongoing reporting. Assemble special teams as required for the due diligence of the business.

Qualitative analysis – Have a standard process for interviews, background checks, and investigations of the leadership team. Determine the business’s reputation within the industry with customers, vendors, competitors, and staff. This process could include questionnaires and checklists, among other things. Establish a process for assessing the cultural fit to your portfolio or organization.

Quantitative analysis – Having a standard list of required records used helps in saving time. Here is a sample list of records:

  • Financials
  • Insurance
  • Intellectual Property
  • Employment
  • Regulatory & Compliance
  • Organizational
  • Legal

One of the aspects not included on the list that private equity companies often overlook are the operational risks and performance of the business.

Girl in a jacket

The list above is a sample and does not cover all areas during a due diligence effort. The main takeaway here is that due diligence should go deeper into the business than just understanding the financials, and that consistency in a process delivers much better results and prevents unexpected costs.

If you would like to uncover the improvement opportunities of a target acquisition during due diligence, schedule a call to discuss how we can help.

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