A lot has changed in the space of a few months. It is almost certain that a lot more will change before the end of this year as the global economy adjusts to the impact of the current pandemic.
But the fundamental principle of good due diligence – asking the right questions at the right time – is one thing that has not been altered by this crisis. In fact, we believe it is more important than ever.
As you and your business consider the new economic landscape, it is vital to ask good questions to ensure you make effective decisions, whether you’re considering a strategic acquisition, hiring new leadership or tackling a contentious situation. The change we are experiencing at the moment means, however, that the content of those questions is going to be different.
Here are some of the issues we see rising in significance in the coming period, all of which can be addressed through effective, timely due diligence.
1. Crisis response
The differing responses of political leaders to the pandemic has garnered extensive coverage and we can expect a string of inquiries into pandemic responsiveness in the years to come.
The differing responses of CEOs and boards has gained less concerted attention. But this will have a significant impact on the future performances of businesses as the economy readjusts. A company’s ability to adapt over the past few months will tell us a lot about the underlying health of the business, not only in terms of operational adaptability and access to capital, but also in the strength of corporate culture and the crisis management abilities of its leadership.
For those seeking to invest in or acquire a business in the wake of the current crisis, a clear view of how a target company has weathered the storm will be vital to assessing its future trajectory. What changes in management, culture and operating structures are required to allow that business to succeed in a new economic environment?
2. Redefining value
The big economic shifts taking place at present mean traditionally safe assets and conventional indicators of value need to be reassessed. Businesses are interpreting the impact of the crisis on their balance sheets in different ways. While some will be reporting higher revenues and enjoying the savings that come with remote working, others will struggle to fill black holes in their finances. The uncertain duration of the current crisis may tempt some to paper over problems and investors will have to be particularly alert for businesses seduced by the concept of “EBITDAC” – assessments of profitability forecasts that wishfully incorporate earnings that would have been accrued had Coronavirus not struck.
Understanding the intrinsic value of businesses in the new environment means identifying how they have adapted to the challenges of the pandemic and recognising where permanent change in their operating model is likely to occur.
3. The pivot to virtual
The accelerated shift of so much business activity into the virtual sphere has been one of this year’s defining characteristics. It has injected rocket fuel into the value of companies that offer virtual platforms and services. Some of these businesses are household names, but some were little known before 2020. So anyone seeking to invest in one of these emerging businesses might well find themselves dealing with a company that has little footprint or track record. The recent Wirecard scandal has shown the risks inherent in engaging with emergent tech challengers.
The pressure to move decisively into the virtual economy will be strong in the coming time. But capitalising on the right investment opportunities means taking a forensic approach to understanding the background, management and performance of target companies, beyond the hype of news coverage.
4. Opportunity triage
Our clients tell us that new investment opportunities are already presenting themselves. This trend will hopefully continue in the coming period. But the form those opportunities take may not always be familiar. If your business is seeking to make the best use of its capital in the new economic environment, you may well have to make choices among a wide array of potential assets. The opportunity cost of spending too much time on the wrong asset will be significant especially if, as we suspect, some companies turn out to have been seriously damaged by impact of the pandemic.
Differentiating between investment options in a competitive buyers' market will demand agility, focus and attention to detail. Early, targeted due diligence can be a vital tool in helping you to establish which opportunities to pursue and which to avoid, before you incur significant transact
5. Radical political uncertainty
The pandemic and its aftermath are all playing out at a time when many developed and emerging economies are undergoing increased political volatility. Coronavirus has been a significant factor in recent unrest in the UK, US and Germany. The economic consequences of the pandemic are radically exacerbating existing social tensions and creating space for arbitrary behaviour by politicians with authoritarian tendencies. Because the pandemic’s impact has been universal, its consequences will also affect the lives of people previously insulated from economic downturns. Overloaded bureaucracies are likely to struggle to respond to new needs, creating greater risk of political dissatisfaction, upheaval and conflict.
Businesses will feel the effects of this volatility in increasingly hostile operating environments and less predictable regulatory and fiscal regimes. Communities and governments are likely to look to businesses for both social and fiscal support. Getting ahead of these changes requires insight into the specific challenges likely to affect your business or sector.
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