The world of PE is projected to experience growth in the coming year.
Reporting from London, Reuters says, “Private equity firms expect an increase in deal activity in 2025, with 84% of the respondents of a survey expecting to execute at least 5 to 10 deals in 2025, according to a Deutsche Numis survey among private equity firms.”
At times, PE deals beget more PE deals as markets heat up and cause a competitive chain reaction. For example, in a recent article, we highlighted Blackstone’s high-profile $8B+ deal with Jersey Mike’s Subs. “When news broke that Blackstone was pursuing an acquisition of Jersey Mike’s Subs, PrimoHoagies owner Nicholas Papanier Jr. said the calls from private equity firms became more frequent,” reports the Philadelphia Business Journal.
With PE deals on the rise, private equity investors and sellers alike must exercise due caution before entering what appears to be a lucrative opportunity. How? The key to PE success is conducting due diligence. What is private equity due diligence, and how can PE firms and business owners sharpen deal-savvyness through enhanced due diligence?
Private equity due diligence is done by all parties involved in a PE transaction with the intent of gathering all the information necessary to weigh the risks and rewards of a potential deal and make a decision. Due diligence starts long before negotiations begin and continues long after making an agreement. However, pre-deal due diligence is arguably the most critical phase and typically takes several weeks or even months to complete.
“The idea behind due diligence is to reduce and allocate the risks and maximize the value for the shareholders,” explains Invest. “ Instead of simply relying on the information shared by the seller and the target company, the private equity buyer will put together a complete analysis of the target and its industry.”
PE investors and sellers often consult with legal and financial advisers who are well-versed in the private equity world. The due diligence process is an investment in itself but can help uncover deal-breakers and protect all sides from an unprofitable agreement.
Compelling reasons behind conducting private equity due diligence include:
- Mitigating legal risks – Due diligence acts as a safeguard to protect investors from exposing themselves to inherited legal liabilities.
- Maximizing ROI potential – Due diligence helps investors and sellers identify the most profitable deals and filter out the rest.
- Making more informed decisions – Due diligence equips all sides of a deal to be more confident in their decision-making, knowing they’ve crunched the numbers and accounted for all relevant factors.
- Strategizing effectively – Due diligence lends to better business strategies, helping all sides move forward with a more comprehensive plan.
- Discovering synergies – Due diligence affords all parties the opportunity to uncover potentially profitable advantages they may derive by joining forces.
- Promoting transparency and collaboration – Due diligence is a chance for all sides to demonstrate their seriousness about the deal and commitment to best practices, often garnishing better relationships.
What is involved in the private equity due diligence process? Let’s highlight seven key steps.
7 Essential Steps to Private Equity Due Diligence Success
PE due diligence is a painstaking process in which investors and sellers must examine all aspects of a potential deal to ensure it’s worth making.
What is discovered while conducting due diligence may lead an investor to back away from what seems like too big of a risk or to proceed with confidence into what checks out to be a profitable deal. What should both sides of a deal look for when conducting due diligence?
Seven critical aspects of private equity due diligence include:
- Financial and tax due diligence – Collect all financial records, analyzing accounts, balance sheets, debts, assets, liabilities, and tax documents.
- Commercial and market due diligence – Conduct thorough research on the market, assessing the state of the industry, identifying competitors, and assessing growth potential. Evaluate brand position and consumer alignment.
- Corporate and HR due diligence – Gather information on the corporate structure, management strategies, and human resources to identify strengths and weaknesses and discover whether management, ethics, and culture can align with investor goals.
- Regulatory due diligence – Compile documentation regarding regulatory compliance and assess the company’s compliance program, checking for costly oversights. Pay particular attention to the handling of sensitive employee and customer information to ensure compliance.
- Legal due diligence – Request information on all outstanding contracts, agreements, and litigation to accurately assess legal obligations and liabilities.
- Operational due diligence – Evaluate the target company’s production systems and IT landscape, assessing productivity and identifying inefficiencies.
- Tangible and intangible asset due diligence – Identify the company’s ownership and assets, including real estate, vehicle fleets, technology, and intellectual property.
After ticking all of these due diligence boxes, all sides must analyze the data and reach a consensus. Of course, taking these steps is time-intensive and demands significant administrative resources. Even then, the above list is by no means exhaustive.
Recommended reading: 13 Types of Due Diligence in Business
How can PE firms and sellers stay organized and keep a deal moving forward? In a word, software. Due diligence software can effectively overhaul due diligence processes for more informed decision-making and more profitable outcomes. How does it work?
Software to Revolutionize Private Equity Due Diligence
At CapLinked, our virtual data room software is designed to accelerate the due diligence process without compromising on the ‘diligence’ aspect. Our VDR tools can speed up the process while enhancing organization, thoroughness, and communication on both sides of a deal.
To illustrate, our virtual data room for private equity due diligence centralizes all of these time-saving and security-enhancing functions into one accessible platform:
- Customizable document organization and permissions
- Effective internal and external communication
- Military-grade data security with 256-bit encryption
- Efficiency-boosting Q&A assignments and FAQ enablement
- Intuitive document editing and collaboration
- Secure document sharing with digital rights management and custom watermarking
- Comprehensive activity tracking and reporting
- Enterprise-level data migration and API integrations
Our VDR solution for private equity due diligence can help you fast-track the back-and-forth iterations of deal-making without cutting corners.
Start leveraging our enterprise-grade due diligence data room on your next deal. We’ll be here to back you up with priority first-class customer support.
