Private Equity Due Diligence: A Buyer’s Checklist

When it comes to private equity acquisitions, commercial due diligence reigns supreme. Proper diligence not only identifies risks, but also uncovers opportunities to drive enterprise value (EV). It can also help you determine if you’re overpaying for a business. Once acquired, increasing sales, lowering costs, and “buttoning up” the investment are all factors that help increase EV. This comprehensive guide, based on our first hand experience in both financing and acquiring companies, dives deep into the critical aspects of commercial due diligence—what to look for and why it matters. Follow this guide and you will be well-prepared to assess potential acquisitions with a game plan for the future. More importantly, you’ll have a crystal clear idea of what to do after you buy the business: just make sure to check the boxes!

What Is Private Equity Due Diligence?

Private equity due diligence is a systematic process that helps investors determine what they need to do in order to underwrite the purchase of a business. It encompasses financial, operational, and commercial aspects to identify risks and opportunities. The ultimate goal is to ensure that the acquisition increases enterprise value through a multiple avenues.

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Our PE Buyer’s Checklist focuses on Commercial Due Diligence, which is meant to maximize EV. Download your free copy today

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Key Areas of Private Equity Due Diligence

Below is a summary of the 7 key areas that will help increase EV and generate returns. Download the full checklist for more detail.

1. Revenue Analysis

• Does the company have a diversified product or service offering?
• Are these offerings mission-critical to customers?
• Can the company cross-sell or upsell effectively?
• Is pricing flexibility sufficient to adapt to market changes?
• Can revenues be predicted with a high degree of certainty (revenue visibility)?
• Are price increases possible given what competitors charge?

Why It Matters: Diverse and mission-critical offerings ensure stability and reduce reliance on a single revenue source. Cross-selling and upselling capabilities maximize customer lifetime value, while pricing flexibility safeguards margins against competitive pressures. Predictable and visible revenue streams ensure consistent cash flow.

2. Cost Structure Analysis

• Does the company have low fixed costs to facilitate scalability?
• Are cost drivers predictable?
• Does high operating leverage translate into better margins with increased sales?
• Are working capital requirements minimal?
• Are EBITDA margins healthy (20-40% or more)?
• Does the company’s earnings match its cash flow (high cash flow conversion)?

Why It Matters: A lean cost structure allows businesses to scale efficiently, while high operating leverage amplifies profitability as revenue grows. Predictable costs and strong EBITDA margins indicate financial health and operational efficiency. High cash flow conversion signals strong liquidity.

3. Organization, Processes, and Efficiency

• Are there untapped regional markets?
• Does the company possess intellectual property or patents?
• Are IT tools and financial controls robust?
• Is the corporate structure lean and processes efficient?
• Is the company well-positioned to expand geographically or operationally?

Why It Matters: Geographic diversification reduces market concentration risks, while intellectual property strengthens competitive advantages. Efficient processes and robust controls ensure smooth operations and minimize disruptions. Organizational efficiency is crucial for scaling operations post-acquisition.

Important Note: Private equity investors love inefficiencies pre-acquisition, and seek to remove them post-acquisition. Don’t shy away from a business because it’s inefficiently operating – this actually presents a great opportunity!

4. Market Analysis with regard to Private Equity Due Diligence

• Is the total addressable market (TAM) relatively large?
• Can the company gain customers within the serviceable obtainable market (SOM)?
• Is the growth rate consistent with market trends?
• Does the market have minimal regulation and cyclicality?
• Is the company’s growth consistent with the industry overall, or do the two diverge?

Why It Matters: A large and growing TAM indicates long-term growth potential. Understanding SOM and aligning with market trends ensure sustainable growth. Markets with minimal regulation and cyclicality reduce exposure to external shocks, safeguarding long-term investments.

5. Competitive Positioning

• Is the company a market leader (#1 or #2)?
• Does the business operate in a fragmented industry?
• Are there high barriers to entry?
• Does the company have a unique selling proposition?
• Is the company insulated from direct competition?

Why It Matters: Market leaders often enjoy economies of scale and brand recognition. Fragmented industries offer consolidation opportunities, while high entry barriers protect against new competitors. Differentiation ensures customer loyalty and pricing power, enhancing competitive positioning.

6. Customer Base

Checklist:

• Is the customer base well-diversified?
• Are customers loyal with a low churn rate?
• Can the company build a strong sales pipeline?
• Are customers financially stable? i.e. can they pay their accounts receivable?
• Can the company adapt to changing customer trends?
• Is there an opportunity to conduct customer reference calls?

Why It Matters: A diversified and loyal customer base reduces dependency on specific clients. Financially stable customers minimize credit risks, while adaptability ensures resilience in dynamic markets. Reference calls validate customer satisfaction and loyalty.

7. Supplier Relationships

• Is the supply chain complex, or simple and reliable?
• Are suppliers diversified?
• Do suppliers have low pricing power?
• Are supplier relationships stable and long-standing?
• Input costs – predictable and manageable?

8. Workforce Considerations

Why It Matters: A simplified and diversified supply chain minimizes risks of disruption. Strong supplier relationships and low pricing power ensure stable input costs, protecting profit margins. Predictable input costs facilitate accurate financial forecasting.

• Are employees unionized or at will?
• Can senior management be retained or replaced easily?
• Is there a clear succession plan for yourself later?
• Are employee engagement and satisfaction levels high?

Why It Matters: Non-unionized workforces provide more flexibility in operations. Retaining key management ensures continuity, while a clear succession plan mitigates risks associated with leadership transitions. High employee satisfaction boosts productivity and reduces turnover costs.

Private Equity Due Diligence is the Cornerstone

Private equity due diligence isn’t just about identifying risks—it’s about spotting opportunities for value creation. Whether through operational improvements, strategic pivots, or financial restructuring, thorough due diligence lays the foundation for post-acquisition success.

Conclusion

By following this private equity due diligence checklist, potential acquirers can mitigate risks and unlock opportunities to enhance enterprise value. Each step of the process—from assessing revenue streams to evaluating the workforce—offers insights critical to making informed decisions. A thorough approach to due diligence not only ensures alignment with strategic goals but also maximizes the potential for post-acquisition success.