Ryan Guthrie, a partner in BDO's Transaction Advisory Services team, took some time to talk with us about several issues facing PE investors, including the importance of thorough due diligence in a frothy environment and the impact of new regulations on the healthcare industry. Below is an excerpt of the interview; the full version can be accessed here.
Q: What kinds of impacts are high valuations having on due diligence, particularly on the buy side?
A: With higher valuations, I think there’s perhaps a need for even more thorough due diligence. If you’re paying the price for a solid-gold brick, you’re going to want to make sure that it’s really solid gold. This includes thorough analyses around the operations of the business to determine what’s really driving its growth and to make sure that your return assumptions can hold up. There might be sensitivity around findings that impact earnings as well, because if you’re paying a high multiple of earnings and there’s a negative adjustment to earnings as a result of diligence, then that multiplier effect would exacerbate because of those findings.
Another trend we are seeing, and it’s related to the current competitive environment, is the lack of exclusivity when doing due diligence. Today, buyers are required to do due diligence without exclusivity. Sellers can make such demands given the demand in the market. We’re also seeing more due diligence being done pre-bid and pre-letter of intent (LOI), which means buyers are either taking a more phased approach and/or committing to doing diligence before locking up a deal.