This brief guide provides specific guidance on what to be mindful of when considering procuring the services of an external consultant for a buy-side due diligence project. From identifying and prioritising your requirements to determining which are to be fulfilled in-house or outsourced to a consultant, by following simple but proven steps you can develop the all-important consultant brief. This maximises your chances of success and gives you a competitive edge in the bidding process by leveraging off specialist know-how whilst avoiding costly pitfalls.
Identify and Narrow the Project Scope
Buy-side due diligence must typically be undertaken as part of a competitive M&A process, often meaning there are significant time constraints, there is likely to be limited access to information/management (especially if you are a competitor rather than a PE buyer) and possibly a lack of willingness from the vendor to entertain numerous and diverse information requests. By understanding your deal breakers as an acquirer you can pinpoint your focus areas and subsequently identify the type of consultant you need. Consider the following when determining the project’s scope and required outcome:
Concentrate on the areas where you know industry-wide risks typically lie, are important to you as an acquirer or are known to affect the target specifically. It is rare to have the luxury of buy-side due diligence being all-encompassing or having both exploratory and detailed phases. For mid-sized transactions your window of opportunity to achieve your objectives is measured in weeks, not months.
Target areas in which there could be material issues for which you expect to seek indemnities in the transaction documentation, are to be reflected in a price adjustment mechanism or in the structure of the consideration. A consultant that can find your deal killers quickly is just as important as one that can help you consummate the best acquisition.
Are synergies important in justifying your valuation? Are you a financial sponsor for which cost reductions will be key value drivers? Or is top-line organic growth the emphasis of the investment rather than margin expansion? If your strategy is buy-and-build/industry consolidation, you need a high quality initial acquisition platform (otherwise you will devote half the hold period fixing rather than bolting-on companies to it). Each of these strategies requires a very different set of competencies and experience to identify and assess risks in a short time frame.
The Consultant Brief
Once the project requirements have been identified and approved by the client, you are ready to prepare the consultant brief. Given the aforementioned constrains of a competitive deal situation, the brief should be:
If you are struggling to specify what your objectives and requirements are succinctly then you are similarly unlikely to be sure of what you need from a consultant. Given the timescales involved in a competitive process, a long and unwieldy project scope is at best unachievable and at worst ever evolving as the client tries to discover what the real priorities are mid-project. This notwithstanding, the consultant should be made aware of the broader strategic considerations at work. Equipping the consultant with an overarching understanding of the deal dynamics will be invaluable in helping decide when it is necessary to go off-piste as discoveries are made.
Clear and Specific
It is unlikely there will be time or budget to correct any deficiencies in the brief, misunderstandings in what was required from the consultant or the support expected from the client. Clear objectives, methodology, reporting and deliverables are prerequisites to success. Further, you should ensure client employees that will interact with the consultant buy into the project brief and are aware of the support that is expected of them.
The consultant needs to be clear and definite regarding information requirements from the vendor/target/client ahead of project launch. Question lists for the target’s vendor/management should also be prepared in advance, and likewise access requirements to management, sites/facilities and possibly material customers, suppliers and regulators should be specified.
There should be well-defined and agreed reporting requirements, information flow mechanisms and applicable timescales in place to regularly assess progress. This will ensure you are made aware of material issues identified by the consultant in a timely manner and thus provide you with sufficient time to assess and act. Similarly, problems in accessing information, engaging with the vendor/target or fulfilling any part of the project brief should be identified and disclosed promptly. It is the consultant’s responsibility to ensure correct information flow, and yours that reporting parameters are set out and agreed from the start.
During the project the consultant will gather a significant amount of information in a short amount of time, but it will be neither feasible nor desirable for most to be written into a lengthy report. Instead, work back from the overarching end result required to determine what your indispensable deliverables are:
Board pack. A detailed deck detailing almost everything reviewed during the due diligence process will require time for the data/findings to be analysed, interpreted and turned into a wide range of outputs, which in turn will require significant support from you to produce in line with you’re your board’s expectations.
‘Red flag’ report. A brief document that typically highlights key areas of further due diligence or a tool to renegotiate deal terms. The consultant should be able to prepare this quickly and independently, as the purpose is not to report on the due diligence itself but to highlight material adverse discoveries.
Operational reviews/guidelines (e.g. M&A integration plans, operational review and cost rationalisation programmes). These reports draw on a consultant’s deep understanding of an industry/process and competencies. They should be detailed, practical and implementable, not strategic. Depending on the nature of the assignment, the consultant will need operational support from the client – be prepared to provide this before the project starts, assign a point-person in your organisation and provide the necessary access across it.
Private Equity Investment Committee (IC) Materials. An experienced consultant will have worked with PE firms previously and hence know what the broad requirements are (cash generation in a large LBO, growth options in a mid-market MBO, prospects in a turnaround target and so on). The consultant can prepare a relatively brief document for IC addressing the pertinent points without digressing toward immaterial detail or blue-sky grandiose advice.
It is easy but careless for deliverables to be an afterthought. However, these are the only tangibles you will have to justify the acquisition (or aborting it), the consultant’s cost or as evidence in legal proceedings.
Why Use an Independent Consultant
An independent consultant can be an invaluable tool or an expensive mistake. The benefits of using an external consultant for a buy-side due diligence can be material and numerous. Whether it is a deep understanding of a discipline or industry, the ability to mobilise at short notice, an on-the-ground presence or the resources that permit management to continue running the existing business, a consultant can mean clinching a killer deal ahead of the competition or walking away from a terrible one. However, if you do not know what you really need, the brief is vague, wide or ever-evolving, then financial costs will rise, time will run out and expensive career-ending mistakes can result.
The client’s commitment to the project and supporting the consultant are crucial determinants of success. Very few buy side due diligence projects can be completed successfully if the consultant does not have open and timely access to the client, especially if they have never worked together. It is counterproductive for a consultant to realise that the project is not a focus area for the client. Consultants do not work solely for the money – the opportunity to forge long-lasting relationships with clients (repeat business), have great projects under their belt as credentials and references (new business) and knowing their work is critical (job satisfaction) are, in the long term, what makes a great client.
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About the Author
José has over 15 years of private equity, private debt and investment banking experience at blue chip institutions across Europe. His experience includes sourcing mid-market acquisition opportunities, executing on these, conducting due diligence, spearheading commercial negotiations and transaction documentation, closing acquisitions and managing portfolio companies. This experience includes developing and implementing organic and acquisitive growth strategies (including buy & builds/industry consolidations), cost rationalisation and optimisation programmes and cash conversion improvements. José is also experienced at raising capital, including equity and debt through direct lending strategies, as well as structuring alternative investment funds in Europe.More Content by José Benedicto