In an increasingly competitive private equity landscape, mastering commercial due diligence is integral to success. It offers a clear picture of potential investments, allowing firms to mitigate risks and assess value more accurately.
Partnering with a specialized provider offers comprehensive industry, customer and competitive analysis, extending beyond what a generalist group can provide. They offer:
Specialized expertise for informed decision-making
Detailed examination of market dynamics
Effective risk evaluation and mitigation strategies
Every quarter our team analyzes the projects we work on with our 500+ PE firm clients to get a bird’s eye view of the market. We recently compiled our Q1 2023 findings into our BluWave Insights Report. You can request your copy and our client coverage team will be in touch.
Key findings from Q1 ’23 include:
Value creation activity is at an all-time high, matching Q1 2022.
Human capital remains PE’s primary area of focus at 45% of all Q1 activity, also matching an all-time high.
Technology remains a priority at 11% of all Q1 PE activity.
Strategic sourcing and procurement is a crucial process that aids businesses to balance revenue growth strategies, smart cost containment, sourcing and operations configuration.
The process entails a strategic outlook on possibilities and requires a well-executed implementation to achieve lower total cost and support revenue growth. In essence, the objective is to attain a balance between operational efficiency and financial performance.
“There are companies that are really trying to build out a platform that allows them to be a strategic sourcing provider to large manufacturers,” says one of our BluWave-grade service providers, Don Jenkins of Supply Chain Management Co.* “So they’re going to help them acquire components from around the world from suppliers. They’re going to administer those contracts. They’re going to handle the logistics of any regulatory issues that fall into that.”
Strategic sourcing is an integral part of supply chain management that provides a systematic approach to assure timely delivery of goods and services and decrease the risk and costs involved in the supply chain.
Investing in supplier relationships is a key aspect of this process.
One expert service provider from our network says his firm has seen an influx of diligence requests in this industry since the beginning of 2022, and it hasn’t slowed down since.
“There continues to be a lot of interest in the healthcare sector, whether it’s device manufacturers or contract manufacturers, and even services,” says Don Jenkins of M&A Healthcare Experts*. “Whether it’s telehealth-related services or just other technology platforms that can address healthcare service delivery.”
Here are some of the top trends and must-haves in healthcare due diligence.
Service Provider Type: Independent Consultant with Financial Expertise
Industry: Healthcare
The Need
Ready to sell one of its portcos, the PE firm was looking for an outside expert to provide pre-sale diligence
The PE firm was ready to sell its diagnostic supplies and equipment manufacturer and was looking for a financial expert to get them across the finish line.
The Challenge
Financial expert to help prepare a portco for sale
The individual would need to help review quality of earnings, perform a market study, validate a financial model, coach management on pitching, and most importantly, be able to close the books and handle data requests.
How we helped
Connected the client witha PE-grade CFO
BluWave provided three experienced resources – all with CFO experience – from its pre-vetted network in less than 24 hours. We were by the firm’s side throughout the vetting calls, and helped them choose a best-fit option.
The Result
Consultant comes on-site and helps the PE firm close the sale in the same calendar year
Months after signing on the independent consultant, who worked on-site throughout the process, another PE firm purchased the portco. The consultant helped the organization with pre-sale diligence, optimized its finance function and ensured a smooth handoff to new ownership.
The buyers commented on the strong foundation and high growth potential of their new asset. The selling PE firm was equally pleased with the process.
We had a great experience with the consultant. My key feedback is that he has a great temperament and worked well with us and management. He has an ability to work independently and delivered solid results.
Commercial due diligence is a make or break process in mergers and acquisitions.
In buy-side due diligence, the focus is on the acquiring party, rather than the target company. This makes it distinct from sell-side due diligence, which is conducted by the organization that may be acquired.
Buy-side commercial due diligence looks extensively at the target company’s financials, operations and overall viability. It’s typically conducted by private equity firms, investors or other acquiring entities to evaluate risks and opportunities before signing on the dotted line.
We’re going to explore the key aspects of this process in private equity acquisitions, including financial analysis, commercial viability assessment and target company analysis.
Financial Analysis in Buy-Side Due Diligence
Financial analysis is a crucial aspect of buy-side commercial due diligence.
At this stage, the buyer reviews the target company’s financial statements, including balance sheets, income statements and cash flow statements.
This helps identify potential financial red flags, such as declining revenue or high levels of debt. Too many warning signs could turn the buyer off from closing the deal.
A commercial viability assessment is also an essential component of buy-side due diligence.
It involves evaluating the target company’s market position, competition and the regulatory environment in which it operates.
This step helps the buyer understand the target company’s growth potential, profitability and competitive landscape.
Target Company Analysis for M&A
Target company analysis is another aspect of buy-side due diligence, and it usually comes toward the end of the process.
While the entire due diligence process evaluates a target company, the goal at this stage is to review operations, management and culture. This is how the buyer identifies issues that could affect the acquisition’s long-term success.
Target company analysis also helps the buyer – usually a private equity firm – understand the potential synergies between the target company and their existing portfolio companies.
Technical debt doesn’t always get a good rep, but it’s not black and white, either.
There are both benefits – usually early on – and consequences, which accumulate with time.
As part of their IT due diligence process, many private equity firms take a hard look at the technical debt they might incur. That means it’s just as important for portcos, as well as private and public companies, to understand what they have on their hands before engaging in a potential sale or transaction.
In addition to defining technical debt, let’s look at some examples and types, as well as the pros of cons.
What is Technical Debt?
In software development, technical debt refers to the cost of maintaining a suboptimal or inefficient software system that was developed with an emphasis on speed, rather than quality.
It’s incurred by prioritizing quick results over a more well-designed code, which will mean more work to fix in the future, often with the objective of quick, short-term gains.
While technical debt can be a catalyst for growth, it can also create a challenges for developers and inhibit scalability.
“It allows companies to create software faster, with the understanding that they will slow down software development in the future. Companies will eventually be forced to spend more time fixing the debt than the amount of time it took them to produce the best solution at the beginning,” writes Trey Huffine of freeCodeCamp.
Companies may eventually be forced to spend more time fixing technical debt than they did to produce the best solution in the first place. It can also be defined as the cost of reworking a solution caused by choosing an easy yet limited solution. It represents the difference between what was promised and what was delivered in a software product, including shortcuts taken to meet deadlines.
While technical debt is not always bad, many businesses use it to launch ideas quickly as a minimum viable product (MVP) and then rapidly iterate and improve them. It can, however, cost more time, money, and resources over time.
Let’s dig in to more details to better understand how technical debt works.
Technical Debt Types
Technical debt can be classified both based on the type of debt as well as how it’s incurred:
Here are some different types of tech debt:
Design Debt
Due to suboptimal design decisions and architecture choices made during the development process.
Code Debt
Arises from poorly written, inefficient or redundant code.
Documentation Debt
This happens when documentation is incomplete or outdated, which can make it difficult to maintain and update software.
Testing Debt
Due to inadequate testing practices, leading to bugs, and other software issues.
Infrastructure Debt
Results from using outdated or inefficient hardware or software, leading to slower performance and reduced productivity.
People Debt
This happens when the development team lacks skills or experience.
Process Debt
Inefficient or inadequate development processes that can lead to delays, errors, and other issues.
