Buy-side due diligence: what and why?

Buy-side due diligence is about doing the right deal at the right price.

In an environment in which competition for the right deal is strengthening, an acquirer needs to be certain that they can generate incremental value over and above any premium that needs to be paid to get the deal done.

Due diligence gives acquirers comfort that they are paying the right price for the right asset, and involves a bespoke investigation of the target’s historical financial, operational, tax, and IT performance and (importantly) future potential under new ownership.

Opportunities for improvements post deal are crucial, and whilst downside risks are the traditional focus of this exercise, successful acquirers should also investigate (and estimate as part of their business case) any upside potential.

An acquirer should understand that traditional financial and legal due diligence remains important, but also that IT and wider operational due diligence is now an integral part of understanding the value of a business. Due diligence should seek to address broader questions, such as:

  • What do the cash flows from historical operations look like on a normalised basis?
  • How does the business operate day-to-day and what is its cost base?
  • What does the current state of the IT used in the business look like, and what is the potential for (and cost of) improvement?
  • How can the asset become more flexible adapting to constant internal and external changes?
  • What upside opportunities exist and how does the business compare to peer performance?

Value to you

The purpose of due diligence is to drive post acquisition value. More specifically this means:

  • Paying the right price for the future cash flows of the target business.
  • Operational, IT, and industry insight to give you an advantage in the acquisition process.
  • Cost reduction and performance improvement upsides that give downside protection if revenue projections fail to materialise.
  • Identification of areas of financial, tax, operational, and IT risk that may be outside your experience.
  • Identification of transaction issues that turn out to be deal stoppers or cause sellers to adjust unrealistic plans.

 A buy-side due diligence process should allow you to:

  • Identify and validate value creation opportunities, and identify risks early;
  • Ensure the financial fundamentals of the business are reflected fairly in the numbers;
  • Uncover potential issues that may impact the deal value before they arise (including financial, operational, and IT risks), and identify additional upsides;
  • Ensure clarity on the cost base composition and its drivers;
  • Provide independent review and challenge of management plans;
  • Assess the effectiveness of current operating processes and systems, including capacity / utilisation / efficiency / capex etc;
  • Identify and mitigate execution risk;
  • Identify any one-off or dual running costs; and
  • Ultimately ensure risks are reflected in the deal valuation.
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