Supporting Due Diligence for Private Equity Firms
The ability of a target company to generate profitable revenue growth is frequently a central element of an investment thesis—after all, profitable revenue growth is the #1 driver of value creation.
Client Case Example
Disease Management and Wellness Company
The company grew quickly in its early years but growth stagnated. New acquisitions and business lines failed to achieve significant new synergies. However, management believed revenue growth would improve and was considering acquisition by a strategic or financial buyer. An interested private equity firm asked us to scrutinize the company’s revenue projections. We identified several significant risks to achieving the projected growth, including increased customer attrition, as well as critical required changes to the sales model, sales management and sales support practices. The private equity firm decided not to pursue the investment based on our findings.
But frequently the risks associated with generating the projected revenues do not come sharply in to focus until after the acquisition—when revenue results fall short of forecasts. Instead of being able to focus on new growth opportunities after the acquisition, the private equity firm and its new portfolio company must scramble to remediate sales and marketing gaps that should have been identified prior to the acquisition, addressed in the post-acquisition action plan, and accounted for in the target’s valuation.
Typical due diligence tasks focus on examining legal, financial, intellectual property, information technology, operations and the external market. Completing a market assessment nd understanding competitive positions are necessary tasks but they are not sufficient to determine whether the revenue projections are achievable.
In our approach to revenue due diligence, we perform the traditional tasks of market evaluation, customer calls and competitor assessments but we add three unique elements that tie due diligence to an actionable growth plan for achieving projected revenue growth. These elements are performed in different degrees depending upon the level of access to the target and their willingness/ability to provide us with information.
We conduct a workshop with the target’s management and the deal team to examine and understand critical aspects of the company’s revenue engine. Then we perform a quantitative assessment of the company’s internal capabilities for generating revenues and capturing growth. And finally, we define the major revenue risks and growth opportunities, including those that may not be reflected in the target’s revenue projections. Based on all our work, we prepare a pre-close growth plan, with management’s buy-in, that provides guidance for the 100-day plan.
Whether there are 5 or 30 days for due diligence, our approach can be tailored to provide meaningful insights for decision making.
For more information about our work in due diligence please contact us.