Seven-Step Due Diligence
1. Proxy Investigation — establishes whether or not a prospective company is in a situation where it is open to abuse of minority shareholders.
2. Financial Statements — is an in-depth review of historical financial statements to establish which items need to be adjusted from traditional accounting earnings to economic earnings.
3. Company's Industry Structure — determines where a company fits within its industry, highlighting the competitive landscape and the balance between a company and its suppliers, customers and competitors.
4. Company's Value Chain — places the company in its value chain. We evaluate how much a company can influence its own destiny. We look at pricing power and cost competitiveness, among other attributes. We like companies that are at the high end of the value chain.
5. Life Cycle of Products — assesses the lifecycle of the company's products and gauges the stability of its historic earnings.
6. Operating Environment — examines the company's operating environment. We put ourselves in the shoes of the management to see how the overall business environment affects the company. We consider economic growth, interest rates, foreign exchange rates and the regulatory framework, each of which can impact earning power.
7. Management — evaluates the skills and judgment of the management team as well as their alignment with shareholders. Dialogue with management is imperative when assessing the investment opportunity. We like companies with co-operative management, who are willing to talk to us. |
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