After graduating from the University of Nottingham with a degree in Finance, Accounting and Management, I took two gap years where I carried out voluntary work (Citizen’s Advice Bureau), an internship...
Hemal Dave, Finance Analyst
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The many sides of operational due diligence
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Due diligence processes are typically attuned to the commercial, legal and financial aspects of a potential acquisition.
Forensic, historical focused assessments of past performance and positioning are used to evaluate upside opportunity and downside risk. The current management team is assessed to determine whether it can be brought onside to work with the investment agenda. But too little attention is paid to a critical aspect of due diligence that can blindside the investor: the risk inherent in the target’s operating model.
Improved company operating performance is central to driving returns. The opportunities to extract value from pure financial re-engineering of acquistive roll-ups are few and far between. Companies and their acquirers, are more attuned to the importance of free cash flow as the primary arbiter of financial health and financial re-engineering cannot alter that.
Roll-ups involve high transaction costs and require long-term, stable markets which, given the current rate of disruption seen across many industries, represent uneasy assumptions. That leaves operational improvement as the principal route for value enhancement.
The full article appeared in the Sunday Telegraph on 7th December and can be viewed here.
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