Improving supply chain due diligence in private equity

Improving supply chain due diligence in private equity

Jeremy Smith Blog, Private Equity

Be honest, how rigorous is your operational due diligence at bid phase? It seems that the reality is that the business mantra of ‘plan for the worst and hope for the best’ seems to be one that is conveniently overlooked when assessing pricing decisions in a market where a 15% acquisition success rate is viewed favourably and risks feel like they need to be taken. This perceived risk can now be considerably mitigated through greater insight.

Historically market due diligence is always robustly carried out. Senior Management due diligence is increasingly more robust yet business systems, processes and capabilities reviews across the strategic and operational delivery are harder to understand, yet no longer impossible.

Procurement is already synonymous with Private Equity, but traditionally during the pre-exit phase from the sell-side. It is also tarnished with the assumption that it is all about cost reduction at the expense of all else. This is a very narrow view of what procurement can do and if you consider that at the mid-market, depending what sector you are in, your external spend, excluding rent, rates and pensions, can be anywhere between 20% and 50% of your revenue, it’s not really an area to treat with such high-level assumptions. The ability to truly understand the spend is an indicator of likely historic cost control. The nature of the spend profile will give clues to how actively the supply chain has been managed. Accelerated capability diagnostics will quickly understand whether the necessary foundations for cost control, strategic sourcing or category management exist within the organisation or the scale of the task to implement them in the next phase of ownership. All of this information is available and all it takes are the right frameworks and benchmarks to enrich this to provide tangible due diligence insight from a cost point of view. All of this will more reliably inform the approach to pricing this organisational risk.

Added to this, with ESG taking a more prominent role and with global supply chains supporting product and service delivery, and the potential for Brexit to disrupt existing supply chains, there is a risk element to the due diligence beyond cost control and valuation assumptions. Compliance and supply security will become more relevant to organisations as they strive to not only become better citizens but also more robust and sustainable. If you work in retail you will likely already have a global supply chain and one which leaves you exposed to supply chain risk both ethically and financially. Manufacturing supply chains are complicated through raw material commodity fluctuations as well as sub-assembly suppliers being based in low labour markets which leaves you committed to long term agreements and potential increasing dependency on supply chains. All of which leaves the potential for nasty surprises in the future, and if you are the potential buyer, is this risk one that occurs on your watch?

These insights can be provided in days, based on desktop based analysis and benchmarking, or in more depth through advanced spend analytics and interviews, but still within a few weeks providing much more depth to pricing decisions and value creation plans.