Diligence tests whether the investment thesis is supported by evidence.
Private company due diligence extends beyond reviewing a management presentation or headline financial statements. AEC research separates reported performance, underlying economics, operating capabilities, management assumptions and identifiable risks so each component of an investment thesis can be evaluated independently.
The objective is to verify material claims, identify inconsistencies and determine which assumptions require additional evidence before an investment decision.
Determine what is actually driving the top line.
Revenue diligence can examine customer concentration, recurring versus transactional revenue, retention, pricing, volume, contract terms, cancellations and historical growth drivers. The objective is to understand both the amount of revenue and its durability.
Rapid growth can have different implications depending on whether it comes from repeat customers, acquisitions, price increases, temporary demand or other factors.
Reconcile reported profitability with economic performance.
Reported earnings can contain adjustments, nonrecurring items or accounting treatments that differ from underlying cash economics. Diligence can examine margins, working capital, capital expenditures, cash conversion and proposed adjustments to normalized earnings.
Material adjustments should be documented and supported rather than accepted solely because they improve the presentation of historical profitability.
Understand how the company functions beneath the financial statements.
Operational review can examine sales processes, customer service, procurement, production, technology, staffing, capacity, suppliers and internal controls where relevant to the business.
This can reveal whether projected growth requires capabilities or investments that are not visible in historical financial results.
Test forecasts against execution history.
Management diligence can examine leadership responsibilities, prior execution, incentive structures, succession risk and the assumptions underlying forecasts. Projections can be compared with historical budgets, actual performance and operational evidence.
The objective is not simply to assess confidence in management, but to understand which elements of the investment thesis depend on specific people or execution capabilities.
Validate important claims with independent evidence.
Where appropriate, diligence can compare company-provided information with contracts, customer data, market research, industry evidence and other supporting records. Material inconsistencies can become additional diligence items rather than being resolved through assumption.
The level of verification should reflect the significance of the claim to valuation, risk and the broader investment thesis.
Search for obligations that may not appear in the headline numbers.
Diligence can consider debt, contractual commitments, customer or supplier concentration, litigation exposure, regulatory requirements, cybersecurity, key-person dependence and other material liabilities relevant to the company.
Identified risks can then be connected to their potential effect on operations, cash flow, transaction structure and valuation.
Separate verified facts from unresolved assumptions.
A structured diligence process records what has been verified, what remains uncertain and which findings materially alter the original investment thesis. Outstanding items can be prioritized according to their potential effect on valuation, transaction terms or the decision to proceed.
The result should be a clearer decision record rather than a larger collection of documents.