Private Equity Due Diligence

Over the last few months, I have spoken to leaders within recently acquired Private Equity manufacturing firms, and some are facing significant challenges. Working on tight timelines, the PEs often feel pressured to close deals quickly and this can lead to shortcuts, especially when it comes to the more time-consuming operational aspects of due diligence. It would seem some firms may try to save money by hiring less experienced professionals or by limiting the scope of the review, often focussing heavily on financial due diligence, as this is seen as the most critical factor in determining a company's value. However, operational issues can have a significant impact on a business's performance.

Consequences of inadequate operational due diligence:
💰 Unforeseen costs: When operational issues are not identified during the due diligence process, they can lead to significant unplanned costs after the acquisition. This could include expenses related to fixing broken systems, addressing compliance issues, or dealing with employee morale problems.
⏰ Delayed integration: Operational issues can slow down the integration process, as the new owners may need to spend time addressing problems that were not previously identified. This can delay the realisation of synergies and other benefits of the acquisition.
🤦‍♂️ Reputational damage: If a PE firm acquires a business with significant operational problems, it can damage their reputation and make it more difficult to raise future funds.
🤯 Increased risk of failure: Inadequate due diligence can increase the risk of the acquisition failing altogether. This can lead to significant financial losses for the firm and its investors.

I question whether some of these struggling PE firms have allocated sufficient time and resources to the operational due diligence process, focussing on areas such as production efficiencies, supply chain management, customer relationships, and employee morale. This may have involved extending the timeline for the deal or increasing the budget for the due diligence team.

It is clear PE firms need to have thorough discussions pre-acquisition with the business’ leaders to get a real understanding of the company's operations and also invest in experienced professionals who have a deep understanding of operational due diligence. Kaizen Talent Solutions has a track record of leading successful search and selection projects to secure the best long-term leadership with these skills as well as having an existing live network of proven professional interims, each with a number of PE deals under their belts.

In conclusion, PE firms should not underestimate the importance of operational due diligence. By conducting a thorough review of a target company's operations, they can avoid costly surprises and increase their chances of a successful acquisition. hashtag#privateequity hashtag#duediligence hashtag#operations

 Simon Owens, Director, Kaizen Talent Solutions simon@kaizen-ts.co.uk