Our Approach to Due Diligence

Our Approach to Due Diligence


Due diligence is an essential part of any acquisition or investment. It helps ensure that the investor knows the risks involved, that they are investing in what they think they are investing in and that the opportunity that believe they are buying or are investing in is valid.

At Prussel & Co we’re experts in due diligence. To help you navigate the world of due diligence, we’ve pulled together a guide to our approach and methodology for due diligence that we use with our client. This guide will help you understand the key parts of due diligence however it’s important to remember that the methodology is only half the picture. Good data and an experience team is essential to providing strong and robust recommendations.

 

What is Due Diligence?

Due diligence simply means doing your homework before entering into a business transaction. Typically due diligence is used to investigate and evaluate a business opportunity prior to making an acquisition or investment and the term due diligence describes the general duty to exercise care in required before any transaction. The term spans investigation into all relevant aspects of the past, present and predictable future of the business of a target company.

 

Why do Due Diligence?

Due diligence is essential to ensure that you fully understand both the business and the risks involved in any investment or acquisition. This helps provide investors with the confidence that they are buying or investing in what they thought they were and that the market opportunity is there and is attainable. 

 

Our Approach to Due Diligence: What’s In and What’s Out

There are a number of different types of due diligence each of which looks at a different element of the business. Typically these are legal, financial, commercial, operational and environment. At Prussel & Co, our methodology focussed on commercial and operational due diligence.. We believe that commercial and operational due diligence should be conducted together given they are to a large extent two sides of the same coin. We work with experts to provide financial due diligence where required and ensure this  aligns with our analysis, for example through the use of the same assumptions.

 

Our Due Diligence Methodology

At Prussel & Co we have a well tested methodology for conducting due diligence reviewed. Our approach to due diligence is tried and tested having worked with many investors and on many different deals of all shapes and sizes. Our approach provides and executive summary and  8 core sections each of which provides a different lens on the business in question.

 

1.Executive Summary: typically written last, the Executive Summary is key to any due diligence. The Executive Summary has two purposes:

  • Summaries  the findings for easy reading.  Provide a single page summary of the finding of the due diligence so that a reader with only one minute to read the pack and digest the key findings.
  • Respond specifically to scope questions: when we conduct due diligence we ensure at the outset that we have a specific set of scope questions that underpin the due diligence. Examples include “is X valuation fair market value” and  “what are the realistic financial projections ranges for Y”. In the Executive Summary section of the document we ensure we answer each of these questions explicitly, referencing the detailed analysis in the document.

2.Company Analysis: the Company Analysis provides an overview of the company situation, its directors and shareholders, the types of shares held by shareholder eg. ordinary vs. preference, cash reserves with the company and any credit facilities used and the sources of any existing funds within the business. The latter is particularly important for early stage ventures where we expect to see that founders have invested in the business. Further consideration is made to any regulatory restrictions or licenses the company may require to operate.

3.Concept or Product Analysis: the aim of this section of the due diligence is to understand the product or service that the company offers. We review the core concept / hypothesis that the business is built around to be able to then drill down into the assumptions that under pin it and test them. This is particularly important for early stage ventures. The second part of the analysis is to analyse the product /service that company offers customers to understand the quality of their offering, any limitations in it and and challenges to scaling. This is then used for competitor analysis later. 

4.Market Sizing and Competitive Analysis: this section of the document focussed on understanding the market the company operated in, the size of it, any defining characteristics that could provide opportunities or threats to the business and the competitive landscape. We split it into two sections:

  • Market Sizing:It’s important to ensure that you use appropriate assumptions when sizing the market, for example, are you looking at a global market, local market, global but English speaking market, the list goes on.
  • Competitive Landscape: We then review the competitive landscape. It’s essential to understand the key features or USP’s of the company and product to benchmark against suitable competitors and assess their relative strengths and weaknesses. 

Find out more about market analysis here

5. Operating Model Analysis: the operating model analysis reviews the structure of the organisation and provides a high level overview of the design of the business through several lenses. These include customers, channels, locations, processes, key suppliers, technology, governance and organisation. The aim is to understand how the business is structured, identify and challenges to being able to grow/scale the business and identify any risks in the design. In addition, we like to understand where the investment will be spent against the operating model at a high level. Eg. do you need to build out the marketing team? Does you distribution model need to scale? Find out more about operating models here

6.Commercial Plan and Traction Data Tests: this section of the due diligence methodology is particularly useful when reviewing early stage businesses and start-ups. Typically seed to series A rounds. Traction data test are used to understand how much progress the business is making towards it’s goals. We use a series of KPI’s to understand traction against three key areas; Customer, Sales and Financials. To find out more read out guide to investment KPIs here.

7.Management and Team: this section of the analysis focussed on the people within the business. We look at two areas:

  • Management: we review the leadership of the business. Those in key roles including C-Suite leadership and any people critical to the day to day running of the organisation. We assess if these individuals have the required skills and experience and ensure that there past doesn’t contain anything of concern (eg. convictions for fraud).
  • Team: with the organisational design section of the target operating model analysis we review the key data points around the team. These include criteria such as  tenure, feelance to perm mix, key man dependencies, skills gaps amongst others. 

8.Risk Management: one of the key sections in any due diligence is Risk Management section. This section of the document brings together all of the key risks identified in the business and in the investment and include details of the mitigants that are currently in place. We assess each risk against likelihood, severity and visibility. Risks are categorised against the above chapters. For any business and any investment decision its important to fully understand the risks involved and this section highlights them. Examples include “There is a risk of slow growth caused by lack of customer acquisition causing the business to not reach it’s financial target”.

9.Investment Analysis: the investment analysis is the final part of our due diligence methodology and brings together the key finding from the review into a financial assessment of the company. For the investment analysis, we will model the projected financials, based on data points taken from the company, executive interviews and market research and assumptions to provide a valuation and financial forecast for the business. Along with the due diligence report, we also provide financial forecasts in Excel to allow for further modelling should this be required.

Final Thoughts

Due diligence isn’t straightforward but we hope that his guide to our approach to due diligence will provide some insight to how we got about our work.

  • Be Logical – it’s essential for all due diligence to follow a logical flow with key assumptions and data points flowing through the document. All recommendations made should easily be able to be traced through the analysis within the document to the data points that underpin them.
  • Experience Matters –a strong due diligence methodology is important however it’s only as good as the team that executes on it. No two pieces of due diligence are the same and ensuring your team have the experience and flexibility required is essential. Utilising an experienced team to conduct you due diligence is the best way to ensure a robust analysis and set of recommendations.
  • Strategic Options: it’s important to not just present finding but also provide clear recommendations again agreed scope questions. This helps provide a clear steer to your audience as to what the extensive analysis means for them.

Our Experience in Commercial Due Diligence

At Prussel & Co we’re experts in Due Diligence. We work with investors to help them review potential investments. To get in touch with us and discuss your requirements and how we can help please email at hello@prussel.com

A highly experienced management consultant, Chris offers first-rate strategic planning, due diligence, business expansion, financial modelling, advisory and financial services industry smarts to Prussel & Co’s clients. He’s completed projects for global firms and startup disruptors and specialises in unique problem scenarios.