Commercial due diligence as a strategy dialog

“Commer­cial due dili­gence is often conside­red a stan­dard product. I cannot agree with this opinion, because in every commer­cial due dili­gence diffe­rent focal points play a role and exactly the company and the respec­tive market situa­tion must be dealt with. Of course, some stan­dards must be met, espe­ci­ally when third parties such as banks are invol­ved. From my own expe­ri­ence, howe­ver, I know that commer­cial due dili­gence is a highly indi­vi­dua­li­zed and complex consul­ting service in which diffe­rent ques­ti­ons are and must be in the fore­ground, depen­ding on the company and the market environment.

This trend toward indi­vi­dua­liza­tion will conti­nue because inves­tors are under high pres­sure to succeed and are follo­wing port­fo­lio compa­nies’ growth paths more closely than they were ten years ago. Inves­tors today are very well infor­med, know the status-quo and the market fore­casts of indus­try experts, so that commer­cial due dili­gence must go deeper for speci­fic ques­ti­ons. At Homburg & Part­ner, we take great care to prepare commer­cial due dili­gence that is as forward-looking and action-orien­ted as possi­ble. In my opinion, the predic­tive power of commer­cial due dili­gence is crucial: stra­tegy-rele­vant ques­ti­ons such as growth corri­dors, tech­ni­cal substi­tu­ta­bi­lity or distri­bu­tion and pricing stra­te­gies must be answe­red and, last but not least, exit scena­rios must be exami­ned in order to paint a complete picture.

I am convin­ced that inves­tors’ requi­re­ments in this regard will increase and that commer­cial due dili­gence will be attri­bu­ted the charac­ter of a market stra­tegy project in the future. The commer­cial due dili­gence will thus provide the basis for the stra­tegy dialog between port­fo­lio company and inves­tor, so that a profi­ta­ble growth path can be successfully pursued toge­ther right from the start.”

“Perso­nally, I attach the grea­test importance to making the entire commer­cial due dili­gence as quan­ti­ta­tive and fact-based as possi­ble. The plau­si­bi­lity check of the sales line, the so-called “top line”, is of course of the utmost importance because it is essen­tial for the invest­ment decis­ion. It is important that diffe­rent scena­rios are conside­red and that the oppor­tu­ni­ties and risks of the possi­ble scena­rios are evalua­ted in detail.

There are seve­ral methods to fore­cast a “top line”. The market view is of course important, but in my opinion it should not be used exclu­si­vely; inter­nal company issues such as the inno­va­tion pipe­line or price poten­tial must also be taken into account, because such issues provide important indi­ca­ti­ons as to whether the company will grow above or below the market. I also think it’s parti­cu­larly important to ensure a close exch­ange with finan­cial due dili­gence so that the further models can be calcu­la­ted through cleanly.”

“Metho­do­lo­gi­cal know­ledge is certainly an important buil­ding block, as M&A proces­ses are usually conduc­ted at a high pace and answers are needed quickly. If you have to think about which ques­ti­ons to ask first, you won’t get them answe­red in time.

Howe­ver, I consider a respec­tive sector and indus­try specia­liza­tion to be much more important. As a metho­do­logy specia­list but indus­try gene­ra­list, indus­try speci­fics may not be suffi­ci­ently reco­gni­zed or scru­ti­ni­zed, and a lot of time is lost in gene­ra­ting basic know­ledge. This is of course at the expense of the crucial fore­cas­ting capa­bi­lity alre­ady mentio­ned. The commer­cial due dili­gence consul­tant must have three main types of exper­tise in this regard: First, under­stan­ding of the company’s value chain in order to assess the dyna­mics of the upstream and down­stream stages. Second, under­stan­ding the busi­ness model in order to properly examine the port­fo­lio company’s value crea­tion approach. Third, an indus­try network to answer invest­ment-rela­ted ques­ti­ons quickly and reliably.

In proprie­tary proces­ses, I also consider a good appearance to be essen­tial. Small and medium-sized compa­nies in parti­cu­lar are not neces­s­a­rily used to armies of lawy­ers and consul­tants arri­ving with lists of data requests and detailed ques­ti­ons. The effect of a quiet, sensi­tive and yet profes­sio­nal appearance is, in my opinion, unde­re­sti­ma­ted, even though it can bring a lot of trust and also moti­va­tion into a company.”

About Alexander Lüring

Alex­an­der Lüring, who holds a degree in econo­mics, has been with Homburg & Part­ner for over ten years and is a part­ner in charge of the Private Equity Compe­tence Center. Alex­an­der Lüring’s philo­so­phy is that all stra­te­gic topics and projects must be imple­men­ta­ble and opera­tio­na­lizable: He under­stands and speaks the language of sales. With this ability, the native of East West­pha­lia has accom­pa­nied more than 120 consul­ting projects; in addi­tion to commer­cial due dili­gence and market and growth stra­te­gies, his consul­ting focus is on sales and pricing power. In addi­tion to finan­cial inves­tors and private equity compa­nies, Mr. Lüring regu­larly advi­ses DAX and MDAX compa­nies as well as many medium-sized compa­nies. In addi­tion to his consul­ting acti­vi­ties, Alex­an­der Lüring regu­larly publishes in jour­nals and books on his core competencies.

About Homburg & Partner

Since its foun­da­tion in 1997, Homburg & Part­ner has been a stra­tegy consul­tancy with a focus on growth topics (market stra­te­gies, sales & pricing). With its Private Equity Compe­tence Center, the inter­na­tio­nally active manage­ment consul­tancy advi­ses in parti­cu­lar small and mid-cap private equity compa­nies along the entire tran­sac­tion process. H&P also has a high level of indus­try exper­tise in the forced core indus­tries of auto­mo­tive, construction/building mate­ri­als, chemi­cals, consu­mer goods, phar­maceu­ti­cals & health­care, and mecha­ni­cal and plant engi­nee­ring. In the last three years alone, Homburg & Part­ner has successfully advi­sed on more than 20 tran­sac­tions. The main product is the Red Flag / Commer­cial Due Dili­gence, which is tailor-made and modu­lar based on the corre­spon­ding indus­try and tran­sac­tion expe­ri­ence. During the 100-day plan and the invest­ment phase, the Mann­heim-based manage­ment consul­tancy advi­ses port­fo­lio compa­nies on all growth-rela­ted issues. Finally, vendor due dili­gence rounds off the service port­fo­lio in the private equity area.