due diligence & valuation
It is our observation that financial buyers have definite advantages over corporate buyers in the area of strategic due diligence. With input from the pros, we have developed an approach based on four principles:
· Ask the big questions to confirm your clear investment thesis
· Determine the target's standalone value based on a rigorous understanding of cash flows
· Ensure synergies work for you, not against you
· Chart a course early to unlock integration value quickly
If strategic due diligence feels like a retrospective bean-counting exercise, you're doing it wrong. The science of book due diligence is vital. But it is a meaningless exercise without the art of strategic due diligence, a forward-looking process that helps you understand how you can create value through an acquisition. The best acquirers investigate targets with a nose for what's really important, identifying the key sources of ongoing value and sniffing out companies that are simply buffed up for sale.
Due diligence is a critical step in the M&A process. In today’s competitive marketplace, a single bidder rarely outsmarts the rest of the field. Rather, the justification to pay more than other bidders must be based on the ability to create more value with the acquisition. Superior insights about the target can alter the valuation in either direction either ensuring a win or a rejection of an offer. Value creation is more likely if the purchaser has a greater understanding of the target company, and a clear and explicit plan for merger integration and value capture.
Many companies approach due diligence as a financial exercise; but capturing value in the merged entity mostly depends on non-financial issues. Consequently, this requires two things: deep industry knowledge to project revenue synergies, and deep functional knowledge to identify, assess, and validate operational cost improvements.
Pre- and Post-Offer Due Diligence
Our due diligence process is based on proven best practices gained from our consultant's extensive experience spent assessing business opportunities and process improvements. Our approach is two-pronged: a pre-offer due diligence to assess target companies before the bid, and post-offer due diligence where the project team has access to internal company information about the target. An important role for a third-party consulting firm is the ability to operate in an external role not tainted with proprietary information that would cause problems in the event the deal does not materialize.
AaronRichards supports both corporate and private equity clients in addressing the critical need for a thorough, focused, and expedient due diligence effort. We focus on:
- Developing a value creation strategy
- Conducting thorough strategic, commercial, and operational due diligence
- Assisting in an integration risk assessment
- Laying out the key considerations for integration
Commercial Strategy
When conducting due diligence, the acquirer must have a commercial strategy that lays out a well-defined plan for creating value. Our three-step strategy guides both the due diligence and the post-close execution:
- Provide a deeper understanding of the target’s industry: We deliver a more thorough understanding of the industry, where it is headed, and how value created can generate an advantage over the competition.
- Provide a strong understanding of competitors and how they will evolve: The marketplace is dynamic, with competitors continually making moves to improve their positions. It is critical to do a deep scan of the competitive context in which the acquisition will take place to understand both how it will better position the acquirer and how competitors may respond to the purchase.
- Find ways to leverage the unique capabilities of your company: The ability to increase the scale of the business, improve capacity utilization, and supply chain performance can provide a competitive edge over other bidders.
Operational Due Diligence
Every buyer must also perform operational due diligence to determine the soundness of the target’s capabilities, competencies, and assets. AaronRichards helps clients understand exactly what is being acquired and how much more effort will be required to integrate the company and fulfill the value creation strategy. We undertake a robust, yet focused operational due diligence to evaluate the capacity of the business to function as a standalone entity. Most important, a good due diligence process provides a foundation for capturing value, both in the short- and long-term.
No More Buyer’s Remorse
Throughout the process, AaronRichards assists in developing pre- and post-merger integration plans, reducing Day 1 transition risks, and understanding how and when value can be delivered. The end result is avoidance of buyer’s remorse, a smooth transition, and maximum value.