Everybody has heard lawyers, bankers, and businessmen talking about ‘doing due diligence’ in numerous instances. However, it is a term that means different things to different people as much as it does in different circumstances.
For us to understand the concept of due diligence in private equity, we will first look at what this term means. Due diligence involves the steps taken before one can enter into a contract or make decisions regarding business. In most cases, completing an asset transaction heavily depends on the results established during the due diligence process. Due diligence is an essential process in preventing any harm to the buyer or seller after a successful transaction.
Due Diligence in Private Equity
Notably, it is possible to perform due diligence in a wide range of areas touching on private equity. For instance, it is typical of limited partner investors to request for the performance history of a private equity firm before entering into a limited partnership. The process involves the analysis of case studies as well as the distribution of marketing materials to ensure that the investors’ capital is well utilized. The due diligence process takes more time in most cases than the actual negotiations of an acquisition agreement.
In a similar case, the private equity firm may perform due diligence to establish the current state of the market before making investments in that particular market. Also, before making acquisitions, the due diligence process essential in assessing the financial statements, evaluating the management, and analyzing business operations of the target company. As such, due diligence is a vital exercise in facilitating acquisitions. It is a sure way of helping the purchaser verify a deal officiated. By providing due diligence information, the seller significantly limits any possible liabilities to the seller. Additionally, it dramatically helps in combining the information necessary in preparing the disclosure letter by the seller.
Why Should Private Equity Firms Conduct Due Diligence?
To avoid doing bad deals: In most businesses, it is not the role of the seller to reveal the “pot-holes” in the market or even organization to the buyer. For this reason, every purchaser seeks to keep eyes open when purchasing to keep risks associated with the defects of a company at bay.
Facilitating Contractual Protection: It is a standard norm for purchasers to seek contractual protection in the acquisition agreement from the seller, for example in the form of contractual warranties. However, due diligence is more useful as it helps in collecting information needed in verifying the price to be paid by the buyer. It also helps in the process of designing the acquisition agreement as well as planning the operations of the business after the completion.
Preventing drawbacks linked to accounts: Relying on a company’s audited accounts at the beginning of negotiations can spell doom to the funds of the investor. As such, the investor must conduct extensive and careful due diligence as well as negotiating favorable warranty protection even on accounts.
Verification of deals: You will agree with me that it is better to investigate a business before initiating any transactions with it. The information gathered during the due diligence exercise is vital in offering the purchaser an essential basis for bargaining a deal.
Due to the increasing demand for due diligence services in business investments, many companies are making a great deal in this field. One of the many companies offering owing diligence services is Corporate Resolutions.
Corporate Resolutions in the Provision of Private Equity Due Diligence Services
Corporate Resolutions helps organizations make right and sustainable decisions when considering investments or even analyzing new hires. Ideally, it keeps you informed so that you are ready to tap every investment opportunity that comes your way.
Following its vast experience of over twenty-five years, Corporate Resolutions has successfully managed due diligence exercises in various fields including deals on private equity. Other areas the firm has performed due diligence include the venture capital investments, selection of fund manager, international due diligence, as well as mergers, acquisitions and IPOs. It has also played an important part in providing information for pre-engagement and vendor screening as well as the appointment of board members.
Therefore, due diligence is a process every business should consider before making investments for success and sustainable growth. It is also important to approach reputable companies for effective due diligence services.