Luke Freeman, Director at Whitecap Consulting, shares five observations drawn from Whitecap's increasing work supporting investment transactions.

Over the past couple of years, the Whitecap team has found itself increasingly being asked to support investment transactions, usually by Private Equity houses, through performing Commercial Due Diligence reviews.

Most of the businesses we have looked at as part of our CDD work have been fast growth tech businesses looking for their first or second round of external funding. Sometimes they’ve been in the business of actually selling technology (ie Software as a Service – SaaS businesses) sometimes they’re providing a service which has their proprietary software at the heart of their proposition and sometimes their future commercial success will be primarily dependent on their Direct to Consumer (D2C) digital marketing execution.

So what have we learned through spending time with these management teams, with the PE Houses and with providers of other elements of the DD (Financial, Digital, Management, Technical)? We’ve made five key observations:

  1. No two businesses are the same 

There’s huge diversity in every part of the private equity universe. Most management teams approach these transactions with a very clear view of their own business proposition but there’s a broad spectrum in their preparedness. Some are incredibly well prepared, well advised and very clear both on their objectives, options and preferences for their financing and on the external market context for their business proposition.

Others are less prepared, and in these instances, our structured questioning of the management team will typically lead to them needing to conduct further work and analysis in order to articulate their plans in a format that meets the requirements of the potential investors.

  1. No two investment directors are the same

Some PE houses’ investment directors are primarily focused on maintaining the momentum of their deal flow and have a tried and tested cadence to follow for each transaction, others are more interested in specific pieces of insight as they emerge from the process.

  1. Commercial Due Diligence can add incremental value

There’s scope to add a lot more value through the DD process. I would say this wouldn’t I, but I think we’re pretty good at what we do and feedback and referrals we get would seem to endorse that view. However, most of what we do in this space is a standalone piece of CDD, conducted at the point in time where any recommendations we provide will likely only be enacted post-investment.

We believe there is scope to make the DD process less burdensome for management, and more useful to the PE House by offering a much more joined-up approach between CDD and the other DD disciplines. In addition, we think that the DD approach could be used by businesses much more in advance of any transaction to really help them get investment-ready. We are working with a network of other DD experts to bring both of these propositions (joined-up DD; Investment readiness) to life.

  1. Raising funding is not easy

All SMEs find the process of getting funding very hard work, albeit to varying degrees depending on the individuals involved. This isn’t a suggestion that investors and lenders should be more cavalier with their money but an observation that for many SMEs even understanding what their options are and how to navigate them can be bewildering. Obviously, corporate finance providers can help here but a surprising number of entrepreneurs aren’t really even aware of the role CF support can play. There’s a role for the whole advisory community to play in helping to join the dots.

  1. There’s a lot to be hopeful about!

Maybe it’s because I’m getting old, but it’s very easy to feel depressed by the state of UK and global politics and the uncertainty surrounding our economy. The reality we see is that there are a lot of very talented, commercially astute, extraordinarily hardworking entrepreneurs in our midst who are building brilliant tech-enabled business offering innovative solutions in growing markets. Phew.

What is involved in Commercial Due Diligence?

The output of a Commercial Due Diligence exercise is a written report, but the way this end product is arrived at can vary. The scope of the work involved in our Commercial Due Diligence projects typically depends on the nature of the business seeking investment, the proposed amount of funding they are looking for, and the existing knowledge of the business or its markets within the PE House.

In the more straight-forward projects we tend to focus on the revenue forecasts provided by the business’ management team, spending time with management to fully understand the assumptions made by them and performing a risk assessment of those assumptions based on our own desktop research, customer (and other market expert) interviews and a comparison of the business’ actual marketing & sales funnel performance against its forecasts.

In more complex cases we’ll perform a more thorough ‘ground-up’ assessment of the markets in which the business needs to succeed to deliver its growth ambitions, looking at the kind of stuff you would expect (size, growth rates, geographic spread etc) but also understanding important trends in buyer behaviour, and key directions of travel on where value lies and where competitive advantage will be sought. This is particularly important in markets subject to disruption by technology which, let’s face it, is pretty much every market!

We are actively seeking to develop our network of contacts in this field – if you are interested in discussing our Due Diligence work please get in contact.