Commercial DD – To outsource or not?
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I know it probably depends on size and complexity of a deal but i’m interested to know from those on this forum if they complete their own commercial DD on a target or outsource this to a firm (i.e. LEK or BCG).
I often find internally if the acquisition is similar to the existing business internal resources know the right questions and spots to look at on a target. On the other hand the big firms have access to data that can be useful at times.
It is important to do hybrid especially when the transaction or industry is complex. You can hire a specialist with industry knowledge to do the details but the internal team can initial assessment. One benefits of external and strong specialists are access to information. They may do similar assessments in different countries can challenge data provided by the seller.
Agreed with Ebrima – it really depends on the scale and complexity of the transaction. Ideally DD should be carried out inhouse as the buyer would be able to pick up red flags and issues which happens operationally on the ground, which DD consultants may not be able to do so just from reviewing documentation and conducting interviews. It is not ideal to take the lazy out to outsource DD as managers and directors ultimately owe duties to its shareholders and they should discharge those duties by being aware of the entire M&A transaction from DD to completion. In certain cases of course it may be worth engaging a DD consultant where it pertains to niche or specialised areas going beyond the capabilities of management – such DD areas are usually confined to tax and legal where DD issues can be discovered most of the time just by documentation review.
I agree with Ebrima & Dorminic – it depends. Outside experts can provide a fresh perspective wherein the internal resources know the more essential questions to ask and answer.
Evrahem has a very point. Both internal and external commercial due diligence is required. Mostly, commercial due diligence is linked to the company cash flow. It is essential to know internally how is that reflected on the projected cash flow. The external due diligence is needed to provide the potential investors with an unbiased view. Internal team showed alight both view as much as possible.
Outsourcing is only effective when supported by strong personnel in-house. Outsourced firms are often not close enough to be able to adequately challenge at the right level
I agree with Ebrima & Dorminic on the ambiguity of the answer. It also depends on the time we have dedicated to do this commercial DD as well as the internal existing in-house knowledge on the underlying markets and fields.
It is always a good idea to outsource CDD to bring in a fresh and independent view on a critical part (forward looking part) of the DD process. The key question is more on the scope of the CDD which can be more or less extensive depending on the company’s industry (fast changing or mature), the company’s competitive position and the acquirer level of expertise in this industry (strategic buyer vs first time PE investor).
In my experience, when you have a strong knowledge of the company and industry that you’re looking to acquire, it’s not necessary to outsource CDD. However, if you’re moving into an adjacent market or different geography it is important that you look to others for their expertise to supplement your internal knowledge.
I believe the decision to outsource commercial due diligence or keep it in-house should align with the company’s strategic objectives, risk tolerance, and operational capabilities. In some cases, a hybrid approach (leveraging both internal resources and external expertise for different elements of the due diligence process) might be the most effective strategy
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