AuthorTopic: about due diligence
ChrisH
@2014-09-22 08:45:41
hi,

Could anyone enlighten me on the core issues of due diligence in corporate finance or investment?

For instance, before you invest in a private company, you research on it and its industry, and you have a long list of questions on shareholding structure, legal, accounting, operation, management, etc. What are the most critical four or five points you should consider when you make the decision of "go" or "not go"?

I am a bit puzzled when I set the priority.

I list the following as critical:
1. Management experience and capability
2. Future cash flow generation(assumptions, and forecasts)
3. Internal liquidity(current ratio, quick ration, cash ratio, leverage ratio. etc.)
4. Operating performance(turnover ratios, profit martgin ratios)
5. Contingent liability

I would like to know if they are right in practical situations such as due diligence in M&A, IPO and equity investment, excluding fixed income side.
Any comments are appreciated.
Thanks
RussianBear
@2014-10-10 18:16:10
I have done some work in this area and I will say it all depends. There are plenty of things you can look at and basically its checking at what the company told you during the "courtship" period is true. That is providing its a friendly deal. Here are some other things you should consider:

Labor contracts
Suppliers and contracts, maybe interviews
Customers and contracts, maybe interviews
Business Plan
Analysis of Liabilities: Loan Covenanats, Golden Parashutes, etc
Management Interviews (very important)
Detail of Cost and Revenue Sources
Products in the R&D pipeline
And others

Basically, its letting a hungry analyst who wanted to do all the things you have mentioned above, go nuts. He can examine whatever he wants and in whatever detail he wants (providing he has time). So, it all depends on what you, the analyst, would consider important when buying a company. After that you can incorporate that information into whatever forecasts and ratios you want.

Keep in mind, I have only done this for a little less than 2 years so its from limited experience that I speak. But I hope it helps, - R.Bear

PS. If you have ever read Barbarians at the Gate, KKR have an interesting dilemma there when it comes to due diligence.

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