3 questions private equity investors should ask before an acquisition

Considering the fact that a lot of private equity deals tend to be worth millions of dollars, if not more, it stands to reason that a little due diligence is sometimes required.

Suffice to say, this due diligence is going to be a long way beyond what a single blog post could cover. However, to give an indication of what one needs to consider before pledging their money this way, we have pieced together the following three questions to help you along.

Question #1 – Are you the right owner?

According to Marc Leder, this is one of the principle questions you should be asking yourself.

In truth, every private equity firm is different. Some might specialise in the restaurant trade, while others might have carved out more of a niche in manufacturing. Of course, some are all-rounders, but generally there is a degree of specialisation when it comes to private equity.

Bearing this in mind, you need to question if you and your fellow investors are the right people to turn the targeted business around. Do you have experience in their industry? Do you have experience in handling the problems that they are clearly struggling with? If there is any doubt on this, you probably won’t be able to create as much value as another private equity firm might be able to generate – and this is clearly a problem.

Question #2 – Does the company have the right management team in place?

Another hugely important question surrounds the existing management team. This is going to be paramount to your success. If they aren’t able to align with what you are going to bring to the company, you are opening yourself up to a whole host of problems later down the line. If this results in them being replaced – it will cost you added time and of course, money.

At the same time, if you don’t think they have the right personnel in place, it might mean that an opportunity has been created. If the target company clearly doesn’t have the right person, someone else might be able to step in and immediately make a positive impact (and thus, increase the value of your investment).

Question #3 – What is the situation regarding the company’s market share?

This is another important query you should pose. If it’s clear that the company is gaining market share, you need to find out just how you can make efficiencies to ensure that this continues, but at a rate that also results in added profitability.

If the market share isn’t growing, this is when you need to do your homework. Who is taking the market share, and what are they doing differently? It’s at this point where you might need to revert back to the first question, and ask yourself whether your investment firm is equipped to tackle these problems which are clearly holding the target company back in relation to market share.