Due Diligence in Private Company Transactions

Acquiring a company always involves some level of risk. The best course foundation for a successful investment is a comprehensive due diligence process, which reduces the risk inherent to the transaction, facilitates more informed decision making, and leads to the potential for higher returns down the road. Before you move forward with an offer to purchase a company, it’s important to understand the steps involved in the due diligence process, so that you’re prepared for what lies ahead. Here’s what you need to consider:

Investment Thesis

To start, it’s essential to decide how purchasing a company will make your existing business more valuable? Developing your investment thesis forces you to consider the anticipated outcome of the investment. Outline your strategic goals and map out how this deal will help you achieve them – make sure that you document this in writing. Then communicate this thesis with your team and advisors, so that it’s clear to everyone involved what key components are truly driving the deal.

Competitive Position

One of your strategic goals in terms of the investment may be to boost your position within the industry. But, regardless of whether or not that is a direct goal of the investment, you should analyze the effect that the deal will have on your standing in the marketplace. The value of the deal may be dependent on the growth rate of the company and its current and projected performance. If this acquisition doesn’t strengthen your business’ basis of competition, it may be necessary to reevaluate the deal.

 Strength and Stability

To alleviate the chance of failure, you need to thoroughly examine the health of the business – and that includes the potential for growth and its customer base. If its profitability is deemed stable, you need to then consider the strength of the business’ current management. Would its profitability depend upon the existing management to remain stable? It’s also crucial to identify if there is a good cultural fit between yourself and the target company. You’ll want the acquisition to go as smoothly as possible between your teams. 

Revenue Synergy

Revenue synergy is achieved when the revenue of the two companies combined (yours and the acquired company) is greater than their individual parts. Determining the potential synergy requires comprehensive research and preparation to accurately project future performance. This is perhaps the most important aspect of the due diligence process. While you gather data, it’s imperative to be realistic and consider potential dis-synergies that would prove unfavorable.


The final part of the due diligence process should be to outline the appropriate course for integrating the businesses. Even if the deal proves favorable, you could quickly lose value if the acquisition plan isn’t outlined to capture the most value, anticipating potential risks and preparing to mitigate them quickly and seamlessly.

Our team specializes in working closely with middle market mergers and acquisitions. If you want to talk to us about a situation that you are working on, contact us today.

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