Chapter 5

Due Diligence

Due Diligence

Covered in this Module

The Management Role

Types of Due Dilligence


Vendor Due Diligence

Today’s Buyout market is characterised by a constant pressure to find new ways to add value, and the due diligence process has evolved so that it is now making an increasingly important contribution to this objective. In a traditional sense, due diligence could be seen as an exercise in verification, or validation; the process of subjecting the facts, assumptions and statements on which an investment decision is based to careful scrutiny. Whilst this is still a central requirement, it is combined in modern practice with the use of a thorough, impartial review of the company’s operations, markets, management, financial performance and strategy to identify areas in which efficiencies can be improved, plans accelerated and new growth opportunities identified. The due diligence exercise, far from being a hurdle to be climbed between agreeing a deal and completing it, has become a central part of the Buyout approach to value creation.

Coupled with the greater expectations of the due diligence process has come an increased urgency. In a market where high quality assets are the subjects of fiercely competitive bidding, speed and certainty of completion is an important part of a Buyout proposal. The process has been adapted in two ways to meet this time pressure. The first is that it starts much earlier; there is a great deal that can be done, especially in terms of appraising markets, without exclusivity or access to confidential information. Early research, either by the Buyout firm’s executives with previous experience of the sector in question, or externally hired expertise, contributes not only to the final due diligence reports but also to shaping the valuation of the target.

The second shift is an increased focus on directly relevant, rather than generalised, due diligence. This focus will be sharpened by identifying at the outset the key commercial issues and using these as a guide to direct the emphasis of due diligence work.

This Module looks first at the management role and in particular at the importance for the team of embracing, and playing an active leading part in, the entire process. We then address each of the key due diligence disciplines, before concluding with a summary of the creative and contributory, as well as the fact checking, aspects of due diligence practice in the Buyout market.