PRIVATE EQUITY COMPANY DUE DILIGENCE How to achieve the best acquisition price and exit return Edited by Shahriyar Rahmati, The Gores Group 2 Published in July 2012 by PEI Second Floor Sycamore House Sycamore Street London EC1Y 0SG United Kingdom Telephone: +44 (0)20 7566 5444 www.peimedia.com © 2012 PEI ISBN 978-1-908-783-09-7 eISBN 978-1-908-783-59-2 This publication is not included in the CLA Licence so you must not copy any portion of it without the permission of the publisher. All rights reserved. No parts of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means including electronic, mechanical, photocopy, recording or otherwise, without written permission of the publisher. The views and opinions expressed in the book are solely those of the authors and need not reflect those of their employing institutions. Although every reasonable effort has been made to ensure the accuracy of this publication, the publisher accepts no responsibility for any errors or omissions within this publication or for any expense or other loss alleged to have arisen in any way in connection with a reader’s use of this publication. 3 PEI editor: Wanching Leong Production editor: Julie Foster Printed in the UK by: Hobbs the Printers (www.hobbs.uk.com) 4 Contents Figures and tables Introduction Section I: Pre-acquisition due diligence Chapter one Chapter one Setting the stage for success By Christian Sinding and Anders Gaarud, EQT Partners Introduction It all starts with deal sourcing Finding the angle Developing the business case Leveraging the experience of industrial advisers Focusing the advisers on key strategic items Conclusion Chapter two Business due diligence: forming and testing the hypothesis By Gary Matthews, Morgan Stanley Global Private Equity, and David Hanfland and Jeff Sexstone, A.T. Kearney Identifying the value hypotheses Develop a deeper understanding of the target’s industry Create a stronger understanding of competitors and how they will evolve 5 Find ways to leverage the unique capabilities of your private equity firm Conclusion Chapter three Operational due diligence By Alex DeAraujo, Welsh, Carson, Anderson & Stowe Introduction Modes of operational due diligence Information requirements Functional/operational expertise Approach to quantify the financial impact Underwriting the deal model Conclusion Chapter four Financial due diligence By Erik Shipley and Mattias Gunnarsson, PricewaterhouseCoopers LLP Introduction Objectives of due diligence Planning well to execute well Data matters Plotting the course Conclusion Chapter five 6 Financial due diligence, an operator’s approach By Shahriyar Rahmati, The Gores Group Introduction Income statement Balance sheet Conclusion Chapter six Tax due diligence By Dawn Marie Krause and Jason Thomas, PricewaterhouseCoopers LLP Introduction Scoping to achieve maximum results Interpreting a tax due diligence report Vendor/sell-side due diligence Conclusion Chapter seven Human resource due diligence By Steve Rimmer and Aaron Sanandres, PricewaterhouseCoopers LLP Introduction Employee demographics Employment terms/agreements Understanding the target’s compensation structure Understanding the target’s benefit plans 7 Management talent assessment Understanding human resource transition challenges Conclusion Chapter eight Modelling how ESG factors can impact risk-adjusted returns By Vincent Neate and Jonathan Martin, KPMG LLP Introduction Increased focus on ESG Understanding the scope of ESG Link between ESG factors and financial performance Long-term benefit for private equity Impact of time horizon on perceptions of risk Exiting responsibly What methods are appropriate to measure these benefits? Conclusion Chapter nine Setting working-capital targets By Nick Alvarez, Anthony Dios, Tim Keneally, Michael McKenna and Krista Servidio, Alvarez & Marsal Introduction Quality of working capital Tax considerations External factors 8 Post-close improvements Conclusion Section II: Post-acquisition implications of the due diligence process Chapter ten Getting off to the right start: the first 100 days post-acquisition By Andrew Mullin, Alex Panas and Kevin Sachs, McKinsey & Company Introduction Putting in place the right management team Overhauling the business plan Communicating priorities throughout the company Aligning incentives with priorities Establishing a process to track progress and to react to gaps Conclusion Chapter eleven Developing post-acquisition plans By Jurgen Leijdekker and Josh Sullivan, Welsh, Carson, Anderson & Stowe, and David Buckley, General Atlantic Introduction Post-close discovery Management ownership and engagement Developing the plan ‘headlines’ Developing the implementation plan 9 The role of outside advisors Conclusion Chapter twelve Buy-and-build strategies By Jason Caulfield and Peter Williams, Deloitte & Touche UK, Parm Sandhu, Tamita Consulting (UK) LLP, and Jeremy Thompson, Gorkana Group Introduction Market activity Rationale for buy-and-build strategies Challenges to buy-and-build strategies Managing the integration Conclusion Chapter thirteen Beyond the board pack: leveraging key performance metrics to drive results in private equity investments By Seth Brody, Apax Partners Introduction The first 100 days Building the foundations From reporting to analytics Truth to transactions Conclusion Chapter fourteen 10