Accurate Due Diligence is Necessary to Ensure That Private Equity Acquisitions are Profitable

Due diligence is best defined as research performed before making a purchasing decision. The devil is in the details when it comes to these sorts of decisions.


Know Where Your Prospective Company Stands Within the Market


A common issue private equity firms experience is related to sales forecasts, which is why reliable private equity due diligence is so vital. Is the business doing well? Will it continue to do well in the future? Private equity firms have to ask this question because they are constantly surveying a variety of businesses. Some firms that use a branded house strategy may acquire company operations that are completely out of the purview of their normal operations. A little bit of psychological understanding is also necessary. The seller may be looking to sell the company specifically because it is going to fail. This can be beneficial for a private equity firm because they can use their existing cash and other forms of collateral to keep the business solvent. Acquisition firms like Berkshire Hathaway have become multi-billion dollar companies because they are opportunists.


Understand the Income Statement


Most companies have a Pareto distribution in regard to sales. 80% of the income comes from 20% of the firm’s products or services. You’ll want to know where every dollar the company spends is ending up. A consulting firm that specializes in lean production may be able to identify wasteful spending. You may also want to consider hiring an executive accountant or chief financial officer that can identify ways to reduce cost. Reducing cost is important, but it is equally important that your business is creating products and services that consumers want to buy. You’ll want to know who the company’s buyers are. It’s also important to understand the positioning strategy of the business. The company may be trying to attract customers that have lost interest in the product. You can certainly fix a bad business by improving management operations, but this is a long-term strategy. Short term profits and losses may be purely psychological or based on external forces like market conditions.


Hire an Executive With Skills That Match the Company’s Needs


A bad executive hire can destroy a company. An executive with poor risk management skills may ultimately make decisions that damage the company’s sales and reputation. If you want to hire a manager for a coffee chain like Starbucks, then you should find one with strong customer service skills. If you are hiring for a company that imports steel, then you may want to hire someone that specializes in global logistics or metallurgy. They must also demonstrate strong leadership skills. Steve Jobs appointed Tim Cook as the CEO of Apple because he was the head supply chain manager for Compaq. This ended up being a brilliant hiring decision because Tim Cook could adopt processes like just-in-time manufacturing. This gave the company a lot of flexibility in terms of demand forecasting. A quality executive can make a good company even better. All employees at the top of the corporate ladder should complement each other. The best businesses are comprised of teams that build each other up as time progresses.

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