Due diligence is a critical step to rope in an investor into the company.
The hunt begins when ‘need’ for external money is felt. Though with due considerations to set norms of approaching an investor, ‘want’ of it may not be synonymous with the ‘need’ felt. Agreeing on a valuation, post first-hand understanding of the business is at times a sticky issue. All the academic research on arriving at a correct valuation metric seems to go unheeded. Parties usually prefer ‘comparable firms’ approach with strange discounting factors on the multiples. Finally, a prelim document called ‘Term sheet’ is signed and dates for due diligence are finalized. Work on an exhaustive checklist begins.
All kinds of possibilities are evaluated by teams- Is the data in place?, Will we be ready in time? etc. In some companies even getting a scanned copy of MOA may be a challenge. Tasks are allocated and work begins by finding all lease agreements, ROC registrations, minutes books etc. The team has to be aligned and given a valid reason for them to work towards the target especially given the sensitivity of the matter. Final milestone is only a mirage at this stage.
Teams get on with the work. There is always group that is motivated towards the task, then there is a section that is building all kinds of possibilities on whether the due diligence is for infusion of funds or sell-out by promoters, still others who doubt if they will continue to have a job. Some are totally cut-off from the demands and live in an alien world where time and priority has no meaning.
Quite surprising in the whole scheme of things is the way the PE has approached the Company. PE ensures 100% confirmation from Company on all aspects of the deal, irrespective of whether the decision to reach the due diligence stage is based on a comprehensive review of company/sector or a pure hunch. The final decision- to invest or not- (to the knowledge of very few) rests with the investment committee of the fund. At times the feedback from the committee is- Sector is not where we will invest, Company does not meet our criteria, Just No for no reason significant enough. And the decision of the investment committee is based on a brief note from one of their team members who lacks even remotest idea of what capability/potential the company has.
I doubt the IRRs expected by the funds across..
Disclaimer: The views expressed are personal and should not be linked to author’s association with any organization.