PE firms evaluate up to 80 deals for each completed acquisition with deal closings requiring the dedicated effort of an average 3.1 subject matter relevant team members, over 20 meetings, and up to 4 rounds of negotiations to complete. This is where tools such as this “Private Equity Due Diligence Checklist” comes in handy, as a reference point to ensure that you’ve considered all the key points.
Due diligence starts with the confidential information memorandum (CIM) the seller provides and contains information such as:
While this document may be long, it is only the starting point of this engaged process. In Private Equity, one looks for problems in a company to get a better deal, but also for problems that can be addressed (e.g. underperforming management can be coached or replaced).
The fund’s investment criteria are typically the starting point of the process. Many prospective companies can therefore be excluded due to their financial profile, industry, geography, or the fund’s focus. Next, we look at a selection of key metrics to confirm and verify the following:
Anecdotally the sooner you can say “No” to a prospect, the faster you move on to a better investment opportunity, so appropriately defining the initial screening criteria is key.
The most comprehensive due diligence checklists always include the following elements:
Depending on your PE fund and target, you will add more categories to be comprehensive and make correct decisions. The due diligence questionnaire will provide many questions and requests to the seller, and the deal team can gather and confirm data via a desk study.
Financial information tells a company’s story and is the most crucial focus for PE firms and sometimes the most challenging data to obtain. The finance list should contain the following elements:
Analyze taxes to uncover ways to minimize liabilities and maximize profits:
Looking at tangible and intangible assets will help you understand the company’s liquidity:
All hardware, software, and systems should be accounted for in the IT section of the PE due diligence checklist:
Review structure, employees, and compensation:
Confirm whether it is subject to current or future liabilities:
Management may determine the target company’s success as a fund’s portfolio company:
Review revenue streams, market position, competition, products, and services:
Deep dive into the company cash flow to determine if provided numbers are accurate and if there are any immediate or upcoming cashflow issues or needs.
Reviewing customers and suppliers:
Understand capital needs for operations:
Your team can use this checklist as a foundation for your comprehensive Due Diligence program. Put your final checklist in a centralized and shared location so all team members can access the information, prevent redundancies, and stay informed.
