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What should a business owner expect from private equity due diligence?

James Darnell
Profile Picture of James Darnell James, a partner at KLH Capital, is responsible for identifying, structuring and executing transactions; due diligence; financial analysis; and portfolio management. He is a member of the KLH Investment Committee and is responsible for all SBIC compliance. He serves on the board of directors for all KLH portfolio companies and is directly responsible for overseeing Federal Resource Supply Company.
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What should a business owner expect from private equity due diligence?


When the entrepreneur has decided to work with the private equity group, and they enter into a contract to close the deal, it will have to undergo a due diligence process that can be quite intensive. If the entrepreneur is prepared for the due diligence process, then it can actually be quite smooth and easy. In the recent article that I published on this subject, you’ll see that there are five main buckets that private equity groups are trying to dig into, including the business fundamentals, the industry, the operations of the business, the financials, and the legal details surrounding the company.

The goal for the private equity group is to verify what they understand about your business already. The process is not designed to simulate a trial, it’s not an IRS audit or anything like that. It’s really designed for the private equity group to understand your business as best they can so that when the partnership is consummated at closing, they will be best equipped to help execute the plan that the business owner and private equity group have come up with.

I said that the key to this process being as smooth and easy as possible is for the business owner to make sure he/she's got the right advisors lined up ready to help with the process, including accountants, lawyers and senior members on his/her management team. There’s an old saying in Alabama that comes to mind, “Many hands make light work,” and this applies to the due diligence process in closing the whole deal.

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