Increasing demands on commercial due diligence

The input of stra­tegy consul­tancies such as Lans­downe takes place at nume­rous points in a tran­sac­tion, start­ing with an initial evalua­tion of a poten­tial invest­ment (red-flag DD), through stra­te­gic or commer­cial due dili­gence (CDD), to post-acqui­si­tion imple­men­ta­tion support for iden­ti­fied opti­miza­tion poten­tial. Our focus in a CDD is the evalua­tion of the company’s manage­ment plans or stra­tegy, the assess­ment of poten­tial risks and the iden­ti­fi­ca­tion of stra­te­gic and opera­tio­nal opti­miza­tion potentials.

This requi­res, among other things, a rapid pene­tra­tion of the busi­ness model, as well as the products behind it, and natio­nal and inter­na­tio­nal markets and compe­ti­tors. For this purpose we tailor consul­ting teams (if neces­sary inter­na­tio­nal) of very expe­ri­en­ced consul­tants and if neces­sary indus­try experts or “execu­ti­ves” paired with long-time CDD know-how, metho­do­logy and bench­marks. Further­more, we analyze the opera­tio­nal perfor­mance of the company in compa­ri­son to the compe­ti­tion and iden­tify addi­tio­nal poten­ti­als that have not yet been reco­gni­zed or reali­zed by the management.

At the end of the due dili­gence, a bankable report is provi­ded to the inves­tor (e.g. private equity, company or banks) and of course explai­ned in detail. These results have a decisive influence on the acqui­si­tion decis­ion and purchase price deter­mi­na­tion. — Our consul­ting services do not stop here, howe­ver, but we are also available to the custo­mer for the opera­tio­nal imple­men­ta­tion of iden­ti­fied poten­ti­als at target compa­nies in Germany or internationally.

In addi­tion to our tradi­tio­nal services of stra­te­gic and commer­cial due dili­gence, our German clients are curr­ently more frequently reques­t­ing support at an earlier stage in the tran­sac­tion process by prepa­ring a red flag due dili­gence, which quickly provi­des an initial over­view of the risks (so-called red flags) or poten­ti­als asso­cia­ted with the purchase of the target company. This helps inves­tors with poten­ti­ally risky invest­ments to make an early decis­ion regar­ding the conti­nua­tion of the acqui­si­tion process.

In addi­tion to support in the actual tran­sac­tion process, we are curr­ently expe­ri­en­cing an increase in requests for opera­tio­nal opti­miza­tion topics, espe­ci­ally after the acqui­si­tion of a company and successful mergers. These include topics such as purcha­sing opti­miza­tion and the restruc­tu­ring of support func­tions. This deve­lo­p­ment also reflects key trends such as rising purchase prices and increased risk appe­tite in the private equity market, which require the rapid release of measura­ble inter­nal opti­miza­tion poten­tial in order to achieve the requi­red inves­tor returns without burde­ning the company’s core business.

We notice a clear trend that both the risk in tran­sac­tions and the risk appe­tite of PE compa­nies in the German market have increased over the last years. We see seve­ral reasons for this. — On the one hand, there is a boom on the demand side. Due to the curr­ently very low inte­rest rates and the resul­ting good finan­cing condi­ti­ons, there is a high level of liqui­dity in the private equity market, which leads to a growing number of play­ers or funds and thus to ever higher invest­ment volu­mes. On the other hand, more and more foreign finan­cial and stra­te­gic inves­tors are flocking to the attrac­tive German market in search of good investments.

On the supply side, strong demand is offset by a rela­tively small supply and high purchase price demands. Howe­ver, the purchase price does not always reflect the true econo­mic strength and compe­ti­ti­ve­ness of the company. The alre­ady great export strength of German compa­nies combi­ned with a weak euro has led to rela­tively high corpo­rate profits in recent years. Howe­ver, espe­ci­ally in global compe­ti­tion, these are incre­asingly influen­ced by exter­nal factors and frame­work condi­ti­ons, which are subject to high vola­ti­lity, while the opera­tio­nal perfor­mance and actual indi­vi­dual compe­ti­ti­ve­ness of the company are more diffi­cult to quantify.

As a result, this leads to riskier invest­ments and a possi­ble overva­lua­tion of compa­nies due to exter­nal, non-controll­able factors. For this reason, we recom­mend subjec­ting a target company’s manage­ment plans to stress tests as part of due dili­gence to check their robust­ness to exter­nal factors.