Due diligence 101 <<Pt.3>>
Understanding the key areas of due diligence for PE firms
Happy Friday Founders & Friends!
Part 3 of due diligence 101 is here. If you missed the past 2 newsletters on due diligence you can check them out below:
Part 1: Highlighting key performance metrics for SaaS Co's
Part 2: How to properly structure a software M&A transaction
In this week's newsletter, we are discussing some key areas of the due diligence process from a PE firm’s perspective.
Let’s jump right in 🤝
The two main factors that differentiate PE due diligence from typical M&A due diligence (strategic acquisitions) are:
As the targets are not usually publicly listed, there is less information available on the company
PE acquisitions are mostly financial in nature rather than strategic, thus the perspective + analysis are different
Key areas of PE due diligence:
1. Industry due diligence
Given that a PE firm’s focus is mostly financial they will usually lack the industry-specific knowledge and operational expertise that a company in the space would possess. That is why in most cases, PE firm’s first step in due diligence is a deep dive industry analysis. This usually includes:
industry size and growth rates
industry’s competitive landscape, key technology, etc.
understanding the target company’s positioning in its industry.
recent industry transactions and their multiples
Gaining an understanding of an industry can be a time-consuming activity but it is a critical piece of the due diligence process and necessary before deciding whether to continue with the rest of the due diligence process.
2. Financial due diligence
An entire month of newsletters could be written on financial due diligence. At the end of the day, the goal of financial due diligence is to understand the health of a business and determine whether its financial metrics fit your investment criteria. Often at first glance, a company may look like it is in a stable financial position but after diving deeper into the financial statements there will be a ton of RED FLAGS. It is vital that firms have experienced financial professionals to spot these red flags before it’s too late….
3. Operational due diligence
The goal of any PE firm is to drive outsized returns through both organic and inorganic growth. During the operational due diligence process, the team will look to seek out areas that exist within a business to make operational changes. These areas could include:
cutting underperforming product offerings
utilizing new pricing strategies
implementing new sales and marketing channels
Other areas of due diligence that PE firms, specifically in the SaaS space, are legal, and technology. We will share some insights on these areas in a future newsletter!
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