Commercial Due Diligence and Private Equity Investments

Due diligence can be a great chance to make sure that the private equity investment has a solid growth plan. This is crucial in an environment that has high multiples. Private equity investors need to achieve significant growth to meet their internal rate-of-return hurdle rates.

Private equity firms that are smart will double-check information contained in an Information Memorandum that is confidential (CIM) by requesting specific commercial diligence. This helps them verify what the CIM provides with additional details to support their Day One growth strategy.

Legal due diligence is an essential element of this, ensuring that the purchase won’t expose the new owner to unanticipated liabilities. The legal team will review the company’s structure as well as the ownership and stock information to find any potential problems.

Physical assets, such as facilities, equipment and stock, are also looked at in commercial due diligence. This will ensure that the assets are in good order and highlight any possibilities for boosting efficiency or maximizing the utilization of assets. Additionally, the team will look at human resources documentation to determine the company’s leadership as well as its human capital such as org charts and roles. They will also review documents related to treasury to confirm the amount of shares bought and then look for rights, debt-equity agreements, or securities that could give current owners preemptive rights. Finally, the team will look at a company’s legal agreements and contracts to discover any possible obstacles to future growth or M&A.

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