GUIDE

Are the due diligence requirements from a private equity investment more or less onerous than a strategic trade sale?

Due diligence is the comprehensive examination of a potential acquisition target to confirm all the facts and financial information. The process will be used to assess the risks and benefits associated with a deal. 

While the level of due diligence required for a private equity (PE) investment versus a strategic trade sale can vary based on several factors, it is not accurate to say one is more onerous than the other. 

The process will be driven by the needs of the bidder – let’s look at how these might vary. 

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It is inaccurate to say one of more onerous than the other. The process is driven by the ambitions of the bidder and is shaped accordingly.

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Strategic buyer 

In contrast, due diligence in a strategic trade sale may emphasize synergies between the buyer and seller, operational integration, and strategic alignment. A strategic investor will likely be focused on a specific element of a business which is of use to them – perhaps a factory, patent or similar. 

They are potentially less focused on understanding the market the business being acquired is in – as they will likely already have this knowledge. 

A strategic buyer sometimes works with a bank, and ensuring the acquisition meets the requirements of lenders will also play a part in the due diligence process. However, more often, the acquisition is financed through the strategic buyer's overall credit facilities and own cash-flow.

How can we help?

While both processes can be rigorous, the focus and depth of due diligence may differ depending on the nature of the transaction and the preferences of the parties involved. 

It is inaccurate to say one of more onerous than the other. The process is driven by the ambitions of the bidder and is shaped accordingly. 

Clearwater can work with clients to ensure the process runs smoothly. We help our clients to navigate the process and present themselves in the best way, according to what the buyer is looking for. 

Private equity investor 

Typically, due diligence for a PE investment may involve an examination of financial records, operational processes, market positioning, and potential areas for growth or improvement. 

PE investors focus on financial performance and the potential returns on investment, leading to a detailed analysis and discussions with banks or other lenders. 

They are focused on getting the best possible return on the equity deployed over a three-to-seven-year period. A strategy will need to be identified to grow the business and this will drive the due diligence process. 

PE investors are unlikely to be spending their own money – they will be acquiring a company on behalf of investors. Due diligence reports are needed to present the case for the deal to these investors, to reassure them the decision is sound. 

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Knowledge

We don't hide behind jargon and complexity. Instead, we aim to open up the black box of M&A, illuminating the path with clear insight, simplifying the process, and delivering valuable information.