Strategic Due Diligence

Determining if the target is a sound investment

Great Prairie Group assists both corporate and private equity clients in undertaking a thorough, accurate, and timely strategic due diligence effort.

Many common due diligence efforts cover just a fraction of the strategic issues surrounding the target company, overlooking other critical questions of value, risk, and upside business potential. As a result, M&A decisions are made based on missing information.

Our approach to strategic due diligence is unique and comprehensive. We inform our clients’ investment decisions through objective fact-based analysis of the target’s strategic position, its stand-alone value, the quantification of synergies, and the estimation of final price. Our method involves getting to the following issues:

Future Performance
What are the drivers of earnings and cash flow? How will supply and demand change? Are future profit streams at risk? What are the strategic issues ahead?

Full Potential
What is the full potential of the business? What are the value creation opportunities? What are the requirements to get there?

We help companies excel at acquisitions by taking a credible investment thesis and stress-test it with the reality check of effective strategic due diligence.

The Results You Can Expect

  • Clarity of strategic position of the target company
  • Deep understanding of the business model
  • Assessment of strategic risk
  • Business valuation
  • Identification of opportunities to create value
  • Fact-based validation of investment thesis

How We Help

We assist clients in planning a successful acquisition.

We provide a series of critical support services.

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Strategic Due Diligence

We help our clients determine the strategic position of the target company. We analyze the strategic drivers of the future viability of the firm, including customer performance, cost position, competitive advantage, risk, as well as the drivers of earnings and and cash flow ...

Strategic Due Diligence

We look at the target company as a standalone entity. The objective is to understand the business in its own right, taking a comprehensive view of its situation and digging deep to get to the hidden issues that matter.

Our analysis covers fundamental strategic issues about the future performance of the target and its viability, including the following:

  • Industry attractiveness
  • Market performance
  • Competitive position
  • Cost performance
  • Opportunity to create value

As part of this work, we identify opportunities to improve the value of the company, including cost savings, growth opportunities, or increased scale. The final results provide insight into the full business potential.

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Stand Alone Valuation

We assist management in conducting a bottom-up valuation of the business, including credible revenue and profit projections, the required asset structure, capital investments, cash flow ...

Stand Alone Valuation

With the situation of the business in focus and a deep understanding of its profit model, the next step is to value the target as a standalone.

We conduct a bottom-up valuation of the business based on the drivers of shareholder value, including the following items:

  • Revenue projections
  • Cost structure
  • Asset structure
  • Capital investments
  • Cash flow
  • Strategic risk
  • Discount rate

As part of this analysis, we perform two types of valuation:

  • Valuing the target based on its future performance, and
  • Valuing the full potential of the business, including value creation opportunities
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Synergy Sizing

We provide a quantitative assessment of the potential synergies that the buyer can expect. We follow a disciplined approach based on top-down and bottom-up calculations ...

Synergy Sizing

Acquisitions that involve combining two entities are justified on the premise that they will create synergies. A common problem of M&A deals is that only a small fraction of the planned synergies ever materialize, if at all. The most prevalent issues include the following:

  • Over-optimistic synergy planning assumptions
  • Poor strategic rationale behind the synergy plan
  • Lack of proper hand-off from the due diligence team
  • Unsupported initiatives to synergy capture

We provide the quantitative assessment of the potential synergies that the buyer can expect, knowledge that is fundamental to confirming the strategic rationale of the deal. We use two different approaches to size synergy:

Top-down synergy sizing: A preliminary step that looks beyond the perspective of due diligence to wider sources of synergy. Identification of synergy opportunities that considers cost, revenue, and capital opportunities. Prioritization based on balancing size, timing, resources, and efforts.

Bottom-up synergy sizing: Refinement of high-priority opportunities for a detailed bottom-up estimation of synergies. The analysis identifies components of synergy and their interaction to estimate the time and resources needed to capture the opportunity.

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Final Price Estimation

We help clients determine an accurate price for the acquisition of the company. We take into account and quantify five items critical to price: (1) the value of the stand-alone target company, (2) the value of improvement opportunities, (3) the net value of synergies ...

Final Price Estimation

We help clients estimate the price of the transaction. By definition, a deal will take place only if the buyer and the seller agree on a price. That price must be higher than what the target values itself. Therefore, this analysis is crucial to closing the deal.

We take into consideration the following items to estimate the final price:

  • Value of stand-alone target company
  • Value of improvement opportunities
  • Net value of synergies (value of synergies – cost to capture synergies)
  • Control premium
  • Total Value

The quantitative assessment of each of these items provides a solid foundation to negotiate a price. Plenty can go wrong at this juncture. Remember, we are talking about buyers and sellers on opposite sides of the deal finding an agreement in a coherent manner across several elements of value of the transaction. Therefore, managers need to be confident, fully informed, and prepared to negotiate from a position of strength.