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When competition is brutal and confidence falters, due diligence can be key to the outcome of a deal, Mark Dunne reports

In August, Barclays Private Equity director Dominic Greer was approached with an interesting proposition. With the equity markets starting to feel the effects of a slowdown, he was offered the chance to help the management team at Global Refund, a provider of tax-free travel services, to buy the company.

Global Refund has operations in 37 countries processing some 14 million transactions each year, and Greer was soon hooked. But despite the firm completing several deals in the financial services sector, he was not sure whether he was paying a fair price for the company in the current economic climate.

Undeterred, he approached Larry Verge, a partner at LEK Consulting to provide a commercial due diligence study of the target business. “We had to assess the prospects of the business and the competitiveness of the market,” Verge said. “This involved interviewing its clients as well as reviewing existing market research to measure the company’s health.”

Armed with the report, Greer was satisfied that he was getting a good deal and subsequently negotiated the secondary buy-out for €360 million (£284 million).

The other side of the story

This was just one of almost 100 transactions that LEK’s London office advised on last year. Other deals included supporting investor Aurigo on its acquisition of tool and equipment lender HSS Hire.

LEK helps vendors groom their business for sale by producing a report to help interested parties assess the value and potential of the business and its market.

Its vendor due diligence work has included assisting Foster & Partners, Lord Foster’s architecture business, when it decided to introduce an outside investor. “The idea was to produce a report to be given to prospective buyers to get them interested in the business, so they could understand its market position,” Verge said.

The report led to private equity firm 3i taking a seat on the board as well as some of the company’s employees.

Growing demand

Verge claims that in uncertain times due diligence is key to the outcome of an acquisition. “The competition for transactions has increased in the past few years, especially with private equity deals. People feel that they need reassurance that they are not paying over the odds and that whatever the justification for the deal it can be substantiated as much as possible.

“The money spent on due diligence is a good investment and is necessary in cases where outside investors are coming into a deal,” he added. “We provide them with comfort that the transaction’s finances and the commercial basis for it are sound.”

Despite a fall in the number of larger deals, Verge observes that the slowdown has not affected the mid-market. “Despite what we are reading in the press, our deal flow is surprisingly solid,” Verge said. “If you roll back the clock to early last year it was a busy time, then credit issues emerged in the second half of the year, but we are still seeing opportunities.

“The level of enquiry and business has continued, but I’m seeing more caution in the deals that are coming through to us.”

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