Lecture on Due Diligence and Private Equity

Introduction

• Focus on due diligence with a broad approach
• Not an accounting class
• Using an investment in a retail business as a case study
• Speaker's background: Worked with Benetton family and Les Wexner
• Exposure to M&A in corporate settings

Private Equity Overview

• Core competencies of private equity
• Due diligence process in private equity transactions
• Importance of non-financial due diligence

Experience and Process

• Evaluating potential investments in private equity
• Working in mid-market companies (revenue $100 million - $1 billion)
• Understanding complexities in integrating businesses
• Transition into private equity from business school

Day-to-Day Private Equity Activities

Sourcing Deals

• Identifying potential acquisition targets
• Networking and deal flow
• Challenges with proprietary deals

Due Diligence

• More than financial review: Includes management evaluation, legal, etc.
• Important to understand the business comprehensively
• Financial modeling: Key concept in leveraging buyout models

Deal Execution and Negotiation

• Negotiating transactions can be complex
• Importance of structured deals and relationships
• The negative reputation of over-leveraged buyouts

Fundraising and Debt Financing

• Difficult and competitive processes
• Importance of maintaining relationships with lenders

Case Study: Retail Business Investment

• Initial idea from an industry insider
• Luxury optical retailing business
• Importance of industry and macroeconomic analysis
• Consolidation play in a fragmented market

Consolidation Plays

• Characteristics of effective consolidation plays
• Examples of benefits: Cost of goods sold reduction, marketing efficiency, brand awareness
• Risks associated with consolidation plays

Due Diligence Process

• Begins with understanding macroeconomic environment
• Involves assessing industry performance and competition
• Evaluating company financials, management, legal aspects
• Importance of professional due diligence (accounting firms, legal consultants)

Financial Due Diligence

• Key focus on balance sheet, income statement, and cash flows
• Challenges with non-audited companies

Highlighted Example: Luxury Optical Retailing

• Market fragmentation and consolidation opportunity
• High sales per square foot and non-cyclical demand
• Unique inventory financing practices in the industry

Major Takeaways

• Due diligence is broader than financial analysis
• Importance of understanding the business environment and operational model
• Managing due diligence with a team of experts
• Avoid overpaying for assets in leveraged buyouts

Conclusion

• Creating value through strategic improvements and responsible financial practices
• The importance of preparing for an exit and ensuring an asset remains sellable