business | Due diligence
investment decision without checking the financial parameters. It is a well-known fact, however, that past performance is not a good predictor of future returns. Commercial due diligence is about looking forward. It is about how the target company is positioned and, most importantly, how it will be positioned in a few years’ time,” he explains. Tsalic says that one aspect of commercial due
Historical performance is no guarantee of future success. Business plans must be examined in detail and market assumptions verified
diligence is a detailed critique of the target company’s business plan. “Typically, the target company will have a business plan, something to show investors how its business will develop. In preparing that, managers will make assumptions about aspects of the business – the market size, the costs of production, the required capital investment, technology trends, human resources and more,” he says. “All of these assumptions need to be tested. Just as a very basic example, one should not simply assume that a 20% growth can be sustained with the company’s existing resources, or even with a linear increase in those resources. Often, achieving further growth involves step changes in terms of strategic positioning, technology, production, physical assets, marketing and sales capabilities, etc.” While it is not essential to be an ‘expert’ in a particular market or technology to take on commercial due diligence work, there is certainly an advantage if you are, according to Tsalic. And the biggest advantage is speed. “Acquisitions are always time sensitive. It takes in-depth understanding of a particular market to do commercial due diligence within the required timeframes and that’s why companies come to us. We don’t have to spend days – and dollars - on basic research because we have done it already,” he says. “What makes us different is our understanding of the
plastics market. Generalists will say: ‘Business is business.’ But we believe if you are going to critique a business plan effectively you have to understand that particular market.” Good commercial due diligence will assure investors
and will expose any potential ‘over-selling’ in the business plan. However, Tsalic emphasises that the process is not simply about looking for downsides. “Most investors will look to commercial due diligence to identify the risks and pitfalls in a business plan. We look deeper than that. The business plan may have been put together by people that have been immersed in that one business for so long they do not see the wider opportu- nities. There are often potential upsides – for instance a further acquisition that would yield synergies or economies of scale. Investors like nothing better than knowing that, with a different strategy, the company could be worth considerably more than the asking price, or that in three or four years it will yield better-than- expected returns provided it is differently positioned in terms of product or customer mix, for instance,” he says.
Another key element in commercial due diligence
work is to consider the acquirer’s exit potential. Today’s financial investors are rarely looking for passive long term ownership of a business so they want to know more than whether they can create a nice business from their acquisition; they want to know how to grow it and whether, when and how to profitably exit. Tsalic says the value of buying in expert due
diligence services is even greater where technology is a critical factor. “In many markets, technology is critical to success and technical decisions can determine whether a company improves its market position or sees it decline. Our techno-commercial due diligence role involves understanding technology trends and examining how the company’s processing plant, know-how and infrastructure fits with its business forecasts.” Techno-commercial due diligence includes an
assessment of existing assets and, if they are insuffi- cient for development of the company’s future, looks for evidence that investment in appropriate hardware has been included in CAPEX plans. It also looks at intellec- tual property to determine whether the company is likely to be free to operate in a particular space and whether the cost of acquiring essential licences or knowhow have been factored in. Finally, it considers the negative impact on a business of the cost and time delays required to meet product qualification requirements. So how does this convert into real world returns? AMI Consulting was commissioned by US-based private equity firm Capital Partners earlier this year to carry out
40 PIPE & PROFILE EXTRUSION | October 2014
www.pipeandprofile.com
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