Due Diligence

Due Diligence projects focus on many concerns, primarily financial, that a potential investor may have and examines them considering the strategic context of the deal and the infrastructure and personnel of the target company. The type of diligence generally falls into the following three areas:

  1. For deals involving debt, Capius will partner with CPA firms to provide both the Capius perspective and a Quality of Earnings report needed for the lender. 
  2. For straight equity deals where there is significant concern about the financial integrity of the target, Capius will examine high risk areas to allow the client to gain comfort with the integrity of the financial statements being reviewed. 
  3. In straight equity deals where the target is an established entity, audited by a reputable public accounting firm, Capius will review the financial information and provide its perspective, providing a link between the deal principals and the accounting issues.

Capius supports Private Equity firms, as well as clients, in their financial diligence. In all cases, Capius will identify: (1) potentially deal-breaking integrity or valuation issues, (2) a perspective on valuation where complex accounting has occurred and (3) a view on the financial and related infrastructure that new investors will be dealing with once the investment is complete. Because of Capius’ experience, we can provide this perspective at a fraction of the cost of most accounting diligence.

Case Study

A leading growth equity firm was in confirmatory diligence on a $30 million initial institutional investment in a privately-held technology company.

The strength of the Finance and IT team was evaluated, based on interviews, review of materials and comparison with other similar companies. The status of key accounting policies was clarified. Weaknesses in the company’s corporate governance, finance and IT systems were identified. Capius identified the key accounting transactions, primarily around stock-based compensation and debt transactions, that led to anomalies in the pattern of earnings. Significant off-balance sheet liabilities related to a past acquisition were also identified. These issues were discussed with the company’s external audit partner.

The result was a clear communication with the Private Equity principals involved that allowed the firm to move forward with the investment at a fraction of the cost of the traditional accounting diligence approach. The investment partner understood the nature of the historical accounting and had a clear understanding of the infrastructure and governance issues that, as a Board Member, he will be overseeing in the future.

Case Study

A leading private equity firm was considering a $100 million equity investment in a publically traded services company.

As an integral part of the deal team, Capius participated in multiple aspects of the process at the target company. We evaluated the management team and structure, as well as financial statements and related documents. Several issues relating to the company’s accounting processes and controls that presented a clear threat to the investment were identified and discussed with both the Target company’s management and external auditors, as well as the private equity principals.

Short and longer-term risks to earnings were identified. Immediately following the close of the deal, the private equity principal was able to provide the CEO of the target company, of which he was now a Board Member, a memo outlining the areas of infrastructure that needed to be addressed and recommendations of the timing and importance of these solutions. Capius also verified the financial valuation model was working to correctly account for accounting issues such as stock-based compensation, net operating losses, deferred taxes, capital leases, and purchase accounting.