Due diligence is spiralling in complexity and corporate deals take longer to complete, but new research has found that management teams see little value in it.
A report by Directorbank has revealed that just 20 per cent of senior members of management buyout and buy-in teams believed they received any useful insights, despite the increasing complexity of the process.
Catherine Houghton, a director at Bank of Scotland’s Integrated Finance Manchester-based team, admitted that the due diligence process has become “a beast. Any deal these days seems to consist of operational, financial, legal, commercial, insurance, environmental…”
Her firm recently took the somewhat unusual step of appointing an operational due diligence expert while funding the £50m secondary buyout of Bolton-based health care products group Verna. When the auction process began back in September, the business was bringing in an automated system to check for quality control on its main product, disposable bedpans.
The vendor, Legal & General Ventures, had invited bids on the basis of financials which included substantial savings from the new system, as it would enable the company to dramatically reduce headcount. Houghton said: “I’d never really used operational due diligence on any of my previous deals because it hadn’t been needed, but this was a key risk and it needed to work.”
Corporate financier James Dow introduced ex-Kelloggs European operations manager Adam Howarth, who carried out what Houghton said was a “very focused” analysis of the new system. Howarth concluded that it would do what was expected.
Paul Quinn, founder of Manchester-based management due diligence provider Quinn Partnership, said the number of private funders using his service had grown significantly in recent years. He initially faced opposition from VCs who were unwilling to subject the management teams bringing deals to them to too much scrutiny.
But Quinn Parternship’s analysis of the suitability of people for their roles in a business scored some early successes — including flagging up an important issue relating to LDC’s buyout of Ethel Austin, on which it made a handsome profit. “I remember that ECI Ventures initially said that they never outsourced assessment of management teams and now we’re part of their standard terms. The banks have lagged behind the VCs in this respect, but we’re getting more work from them”.
Indeed, Quinn Partnership recently found itself delivering its verdict on a management team to a member of a credit committee deciding whether or not to provide bank funding for a deal. It has also been used by a Japanese insurance firm which assisted in asset-based lender KBC Capital’s backing of a management buy-out team which recently acquired Nantwich-based distribution firm Multisol for £36m.
Carl Wormald, director of LDC’s Manchester office, said that banks regularly feed into due diligence streams and often request further information about specific parts of the business. “DD is not an area where banks and other funders can afford to cut corners, especially in the current environment,” he said.
Tony Dean, a director of Royal Bank of Scotland’s Manchester-based corporate department, said that to date it had only used due diligence experts on its private equity deals. He said that he felt it would be too tricky to ask existing customers looking to borrow money to undergo the process.
However, Wormald said some of its management teams had been encouraged to use the commercial due diligence process to learn more about its own customer base.
Mike Hicks, head of asset management at Grant Thornton, co-sponsors of the Directorbank research, argued more management teams should push to do the same. “Given the time and costs involved, directors should insist that advisors not only scrutinise the past but generate future value for the business,” he said.
Due diligence gets a taste of its own medicine – Crain’s Manchester Business