Commercial Due Diligence and Private Equity Investments

The due diligence process is an opportunity to ensure a private equity investment’s growth strategies are sound. This is especially important in an environment with high multiples. Private equity investors have to show substantial growth in order to meet their internal rate-of-return hurdle rates.

Smart private equity firms double-check the information contained in a confidential information memorandum (CIM) with specific commercial diligence requests. This helps them confirm what the CIM provides with additional details that will help support their Day One growth strategy.

Legal due diligence is a critical component of this process, ensuring that the purchase won’t expose the new owner to unforeseen liabilities. The legal team will review the company’s structure, ownership details and stock information to identify potential issues.

Other areas of commercial due diligence are checking the physical assets, like facilities, equipment and inventory. This will help confirm that the assets are in good condition and highlight any opportunities for increasing efficiency or improving the utilization of assets. The team will also review documents related to human resources to understand the organization’s leadership human capital, org charts, as well as roles. They will also examine documents related to treasury to confirm the number of shares repurchased and check for any rights, debt-equity contracts or securities that might give current owners preemptive rights. Additionally, the team will examine a company’s legal contracts and agreements to identify any obstacles that could hinder future expansion or M&A.