Commercial Due Diligence Commercial Due Diligence

Commercial Due Diligence (DD)

Our Due Diligence process delivers 3 things:

Highlights the reasons why you shouldn’t continue with the acquisition. A DD needs to clearly flag the risks of the potential investment and should never just assume that you will go ahead with the deal in any case

Ideally, identifies opportunities that the other party might have missed, effectively enabling you to acquire the target company at a discount

Provides you, in plain language, with unambiguous recommendations about what you should do next

We prefer to deliver the DD in 2 phases

• Phase 1: Pre-Due Diligence – largely a desktop study
• Phase 2: Full-Due Diligence – examines the target company in detail
The second phase only happens if Phase 1 is successful

In Phase 1, we develop a hypothesis about what we expect to find at the target company, we scan the macro and competitive environments, understand the constraints the target company’s value chain, and do the initial Company Analysis. In Phase 2, we examine the target firm in detail, project managing the specialist team (e.g. legal, financial, systems, technical) who will deliver the final report and the Benefits Case for going ahead (or not).

Our Company Analysis methodology is Scorecard-based and quickly gives a thorough overview of the target business. We are conscious of causing the minimum disruption to both the Buyer’s and Seller’s businesses until it is clear that a deal is very likely. This helps to reduce the people Change Management effort later.

The Benefits of our approach

Unambiguous recommendations

Splitting the DD into 2 phases (Pre and Full-DD) enables the Buyer to rapidly ascertain whether there is any point in proceeding, and to opt out quickly if there isn't

Minimal disruption to both the Buyer and Seller businesses

Case Study

We highlighted major risks in an intended acquisition and substantially renegotiated the share purchase price

Client: International oil recycling firm
Industry: Oil & gas

Challenge

The Client company (based in Monaco / South Africa) had identified an acquisition opportunity in Australia. This would give access to an exciting new technology which had the potential to be a game changer in the Client’s sector.

The target acquisition was, essentially, still in start-up phase and the intended M&A saw the Buyer provide some investment and an option to acquire 51% of the business in the future.

Solution

The Commercial Due Diligence project comprised both desktop and on-site studies.

Approach

We paid particular attention to understanding other attempts to make the technology work elsewhere and the personalities involved in the target firm.

Our project was supported by a Technical DD which, on the face of it, showed that the technology had potential. However, our conclusion was that, while the opportunity had potential, it was massively over-valued. We then sought to mitigate the risk by substantially renegotiating the share price and the terms of the investment.

Result

The Commercial Due Diligence, showed that the target acquisition was a much higher risk than the Buyer had initially believed. This enabled the consultants to negotiate the price for 51% of the shares down to approximately 1/3 of what was originally proposed for first right of refusal for the same shareholding.