After years of record corporate profits and inexpensive credit, the price of nearly all middle market acquisitions— from manufacturing to technology and healthcare — has soared. For private equity investors, that has made the diligence process more important than ever.
Getting due diligence right starts with going beyond the surface metrics and scrutinizing the details that will paint the most complete picture of any company’s future value. PE investors should consider these six areas, among others, to maximize their return on investment:
- Look deeply at variable costs: A company's variable costs, which one expects to move with sales, often reveal significant ways to capture savings and efficiencies.
- Look at fixed costs just as closely: Fixed costs such as occupancy can suggest where production facilities might be consolidated to maximize capacity utilization of capital equipment.
- More than customer concentration - understand churn: Understanding a company's customers reveals a great deal about how vulnerable the business may be to shocks.
- Look at the management team, but also at process: A company that can grow as quickly as private investors expect needs a strong management team as well as strong business processes.
- Look at the pipeline, and the R&D roadmap as well: Great companies conduct detailed analysis to make decisions and chart their future growth, whether that's figuring out where to add new products or how to expand into new markets.
- Look for a platform and add-ons: Getting the best deal goes beyond merely understanding everything about a great company, but researching the broader market to gauge which firms could be added to the acquired "platform" company to produce an enterprise that will be more valuable than the sum of its parts.