How CoVEST Capital disrupts due diligence: colleagues first, cash later

25 March 15

An article published on the Business Review Weekly (BRW) website on 25th of March 2015, explains CoVest point of view about Due Diligence. A summary of the article can be read below:

"Traditionally, buyers of small to medium-sized businesses rely on due diligence to evaluate whether to proceed with the acquisition or not. The theory is that the investigations conducted as part of due diligence enable the acquirer to develop an understanding of the business and enable informed decision making.

The reality is very different: at best due diligence allows potential buyers to develop a fragmented and superficial understanding of the acquisition target. Hence, it does not come as a surprise that frequently the acquired business fails to achieve target and deliver expected return....

At CoVEST Capital we believe that prospective buyers, especially those of small and medium-sized businesses, need to perform a different type of due diligence to gain a level of insight and understanding that enables them to make an informed and confident decision while minimising disruption for owners.

As fund managers and custodians of investors’ capital we have an obligation to de-risk investments and ensure we can fulfil on our promise on an internal rate of return (IRR) of 25 per cent. To de-risk investments, due diligence, as it is commonly practiced, is a necessary condition but it is not sufficient....

After signing a term sheet with the vendor we take the business through a structured process, we call it the Investment Readiness Program. The program has been designed to add real value to owners. We spend considerable time, up to two days per week, in the business and team up with management and staff to improve business performance (we charge $20,000-$30,000 per month for this).

At the outset and in a highly collaborative context we identify two to three areas relating to revenues or expenses, in which performance can be enhanced in the short term. Our main objective is to realise measurable improvements in the shortest time possible. For this reason the focus is on operational rather than strategic business areas....

Traditional due diligence has serious limitations. The Investment Readiness Program has been designed to address them: it adds value to management and owners and provides a completely different quality of insights."