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Three-Dimensional Financial Due Diligence

By September 30, 2013Newsletters

While most business undergrad students are chugging away at learning how to compile financial statements, most MBA students are learning how to pair that financial analysis with other important reports, including employee turnover rates, fulfillment percentages, and customer satisfaction and brand awareness metrics, in order to perceive an interconnected outlook on the Company.

Our consultants are noticing that financial diligence projects appear to be graduating to the next level: standard diligence reports, like QoE and working capital analyses, are the minimum that clients are demanding these days. The following are insights from our diligence work with middle-market private equity funds:

  • Beyond Finance: In addition to the “bread and butter” diligence reports, clients are more often asking for specific commentary on risk areas, including our perceptions of the quality of management and how dependent they are on key personnel, as well as understanding the sales channel, the customer base, and the strength of those relationships.
  • Going Downstream: Lately, we have seen purchase multiples increasing on “clean” deals and, as a result, more funds in our network are “going downstream,” looking at smaller and more complicated (from a financial diligence perspective) companies. Many of these targets have never been audited, requiring a “roll-up-the-sleeves” mentality to diligence and a keen eye on “completeness.”
  • Post-Transaction: Funds are more acutely aware that good starts lead to good finishes and, as a result, are focusing more financial diligence activities around what they will need to do post-transaction – are the reporting processes in place? What is their IT system? Financial controls? All of this is helpful in prioritizing which areas to focus on for improvement, post-transaction.

If you find yourself with a two-dimensional financial picture, consider adding some specialized “brushes” to your repertoire and paint a three-dimensional perspective.

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