Commercial Due Diligence and Private Equity Investments
Due diligence can be a great opportunity to ensure that an investment in private equity has a well-planned growth strategy. This is especially crucial in an environment with high multiples. Private equity investors need to achieve significant growth in order to achieve their internal rate-of-return thresholds.
Smart private equity firms double-check information in the confidential information memorandum (CIM) with specific commercial diligence requests. This enables them to verify what is stated in the CIM along with additional information that will help support their Day One Growth Strategy.
Legal due diligence is an essential component of this procedure, as it verifies that the purchase will not create the new owner to unanticipated liabilities. The legal team will look over the structure of the company, ownership and stock information to identify any issues that could arise.
Physical assets, such as equipment, facilities and stock are also scrutinized in the commercial due diligence process. This will ensure that the assets are in good order and identify any opportunities to improve efficiency or increase utilization of assets. The team will also review documents related to human resources to determine the company’s leadership as well as human capital and chart of orgs, as well as roles. They will also examine the treasury records to confirm the number shares that have been purchased. They will also look for rights, debt equity agreements or securities that could give current owners rights that are preemptive. The team will also study the legal agreements and contracts of a business to discover any roadblocks that could prevent future growth or M&A.