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Commercial Due Diligence and Private Equity Investments

By August 29, 2023August 31st, 2023No Comments

The due diligence process is an opportunity to check that a private equity investment’s growth plans are strong. This is crucial in a high-multiple environment where private equity investors need to show significant growth in order to reach their internal rate of return threshold rates.

Smart private equity firms double-check all information contained in a confidential information memorandum (CIM) with specific commercial diligence requests. This allows them to confirm what is written in the CIM along with additional information that will aid in implementing their Day One Growth Strategy.

Legal due diligence is an essential component of this procedure, since it confirms that the purchase will not create the new owner unforeseen liabilities. Legal experts will scrutinize the company’s structure, ownership details and stock information in order to spot potential problems.

Other areas of commercial due diligence include looking at the physical assets such as facilities, equipment and inventory. This will confirm the assets are in good working order and uncover any opportunities to increase efficiency or improving the utilization of assets. The team will also review documents related to human resources to understand the organization’s leadership as well as human capital and chart of orgs, as well as the roles. They will also review treasury documents to verify the number of shares purchased and also look for rights, debt-equity contracts or securities that could give current owners a preemptive right. Finally, the team will examine a company’s legal agreements and contracts to determine any obstacles that could hinder future growth or M&A.

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