Summary Text
As the likelihood of closing a transaction increases, so will the number of individuals working towards a close. A small investment team comprised of 5 to 10 individuals might expand 10-fold if all individuals with engaged third parties and sources of capital are included. In this lesson we will explore the roles played by third parties in due diligence.
Diligence: Short for “Due Diligence” and the work required to evaluate a business as thoroughly as possible in the time available. Unfortunately, there is never enough time.
Every “diligence” is a team effort, both among the individuals on the deal team and among the deal team and their advisors. As the firm doing a deal, your advisors are crucial partners, not only during diligence but also long after a target is acquired. No firm, no matter how large, is capable of diligencing every aspect of a target thoroughly without some help from the outside. Learning how to successfully select and manage third party advisors is a critical skill for anyone hoping to build a career in private equity.
For context, at a larger firm doing later stage diligence on a target, it would not be uncommon to have ten or more separate advisors and upwards of one hundred individuals working together on a deal. Coordinating seamlessly among all of them to get to the right answer is no small task.
Third party advisors can fill a variety of roles in diligence, as we will explore below, but as a general rule of thumb, there are typically two types of advisors that private equity firms will work with during diligence:
- Specialists – This group includes professionals that bring a unique skillset or specialized knowledge that the deal team lacks. This might include lawyers, accountants, and industry consultants, among others.
- PE Team Expansion – Additional manpower or “boots on the ground” that the deal team brings on to amplify capacity on key tasks (e.g., analyzing a large, complex dataset, conducting site visits, completing surveys, etc.).
It’s important to keep in mind that particularly with the breadth and depth of expertise that exists within many legal, accounting and consulting firms today, the same firm may often fill both of these roles on the same diligence across different tasks, which is one of the many reasons why selecting the right advisors to work with is so critical to a successful due diligence process and acquisition.
Please see the PDF notes available for download.