Presenting Uncouched Due Diligence Opinion

The request for due diligence, coming at a point where a company’s management may have expected the arrangement to proceed without friction, may meet a chilly response. It’s a situation investors and lenders may recognise; they wish at heart to support the company’s team and start a mutually beneficial relationship together, but some commercial fundamentals in the business are unclear. Understanding what could go wrong in a potential transaction is as important as understanding what is right about it.

Recognising these sensitivities, CSA has designed a flexible approach to due diligence reporting which aims to query potential areas of business and market risk without upsetting the management team with overly time-consuming and costly investigative detail.

In early discussions with our client, whether the client is a private equity sponsor or debt lender, we will define together the depth of scope is likely required and in what timeframe, working back from a given drop-dead date based on the transaction’s exclusivity period. At this point, we will also ask to review aspects of our client’s initial credit application note, the company business plan or an information memorandum accompanying the proposed transaction.

We believe that this is a vital early step in the process, helping us to outline the key issues and priorities within the deal compared to those already identified by our client. The issue might be that while the EBITDA multiple, based on historic earnings, may look sufficient for the arrangement, there may be one or two ‘loose bricks in the wall’ that could be the undoing of the company’s trading activities in the future.

Typical situations that can be uncovered during the due diligence process can include:

• Gaps in company functional resources
• Customer concentration/supplier dependency
• Weak forecasting visibility, delayed sales traction
• Unsatisfactory customer references
• Competitor aggression, impacting volumes and pricing
• Economic or technologic shift causing substitution or redundancy
• Political legislation and industry standards causing market hesitancy

Early recognition of potential ‘deal breakers’ allows key issues to be sensitised – often in conjunction with other advisors to the transaction, such as Financial or HR – to ascertain their weighted impact on the attractiveness of the financial case.

Whatever depth of analysis is deployed, due diligence should not couch its stated opinion of the transaction in ambiguous terms. Clients and company management both require early and clear opinions, devoid of any unexpected surprises in their final reading of the reporting consultant’s written output.

CSA’s strategy and due diligence advisory services sit alongside and complement the day-to-day activities of company management. We provide independent and objective evaluations of strategic direction and customer value creation, providing a road map for business performance improvement.

For information about how we can help you to assess business and market attractiveness please call: 0208 947 5108.