Diamonds in the Rough: What to Look for During Due Diligence

This article is the third of five in our ‘Diamonds in the rough’ series and explains what to look for during the due diligence process when considering the purchase of a distressed business.

After identifying a distressed investment opportunity, swift due diligence needs to be performed on the business to quickly determine whether turnaround strategies can be implemented to drive profitable growth and create a ‘gem’ of a business.

Discovering valuable diamonds

Discovering the true hidden value of a distressed company (or a discrete business segment) often relies on engaging independent third-party advisors with experience in conducting due diligence in special or distressed situations.

While the due diligence process is critical in any M&A transaction, it can be particularly challenging when looking at distressed opportunities as you often face limited timeframes and need to prioritise the areas to focus the due diligence on. Invariably the priority is always on what is the short-term restructuring plan, how much will it cost and who is going to implement it. Anything beyond this will only be possible if time permits.

What to look for

Prior to committing to a distressed transaction, a buyer should focus its due diligence effort on understanding where the business has been, what drove the distress (for example, was it a one-off event or more of a systemic issue such as slow economy, low commodity prices, failing product lines, market share or mismanagement), and ultimately how the business can be improved in the future.