Due diligence is an opportunity to verify a private equity investment’s growth plans are solid. This is crucial in a market with high multiples. Private equity investors must achieve substantial growth to reach their internal rate of return hurdle rates.
Smart private equity firms will double-check the information contained in an Information Memorandum that is confidential (CIM) by asking for specific commercial diligence. This will help them confirm what the CIM states with additional information that can support their Day One growth strategy.
Legal due diligence is a crucial part of this process, to ensure that the purchase won’t cause the new owner to unforeseen liabilities. The legal team will look over the company structure as well as the ownership and stock information to identify any issues that could arise.
The physical assets, such as facilities, equipment and stock, are scrutinized in the commercial due diligence process. This will help confirm that the assets are in good working order and help identify opportunities for increasing efficiency or improving the utilization of assets. In addition the team will take a examine documentation on human resources to better understand the company’s leadership and its human capital such as org charts and roles. They will also review the treasury documents to confirm the number of shares that have been purchased. They will also look for rights such as debt equity agreements or securities that may grant current owners an unfettered right. The team will also review the legal agreements and contracts of a company to determine any roadblocks that could hinder growth or M&A.