“Due Diligence” is the term applied to assessments conducted by a potential investor when they are looking to invest in or acquire another company. This is usually conducted by a third party with the right experience and knowledge to accurately assess and evaluate the target company. The third party – usually a specialist consulting firm – works with the target company to compile a comprehensive report that is provided to the potential investor, allowing them to better decide how to proceed.
Due diligence can cover many aspects of the business, but usually covers four categories:
- Commercial due diligence
- Technical due diligence
- Legal due diligence
- Financial due diligence
At Penser, we specialize in commercial due diligence and technical due diligence in the financial technology industry. We have successfully guided the investment decisions of private equity and venture capital investors, as well as corporations, across their investments in payments, digital banking, wealth management and lending.
Considering our experience in this sector, we wanted to share some insight on how the process works, and what we look for when conducting due diligence.
Commercial Due Diligence
When we conduct commercial due diligence, we try to understand how the target company is performing in the industry today. To do this, we spend time with the target company to understand where they stand in their current business performance and what their future growth plans entail. We also look at external factors that might influence the company on its journey.
Let’s break it down into five key segments:
1. Market drivers
First and foremost, we want to understand how the market is changing and developing. This takes into account factors such as regulations, technology developments and the target company’s position in the landscape. We want to build a comprehensive picture of how likely it is that the company will achieve its business growth projections and call out any potential obstacles early on.
In the payments and fintech space, in particular, the market is evolving, and changes occur (almost) overnight. Technology today is growing by leaps and bounds, resulting in changes that are hard to foresee, without the right depth of expertise. As specialists in this field, we have developed a strong understanding of the existing technologies and market dynamics, allowing us to better assess where the target company stands in the field, and how changes in the market might affect it.
2. Competitive landscape
The next thing we look at is the target’s competition – who are they? How much market share do they own? What benefits do they offer to their customers? Through this, we build a picture of how the target company compares to its competition and can clearly identify where the company offers unique value to its customers. We conduct this assessment on both a local and global level, as competition in financial technology is truly global. Clients are also able to utilise this information in the development of a value creation plan following the investment or acquisition.
3. Customer evaluation
Up next is evaluating the customer, and how well the company’s solution fits with the customer’s needs. We assess how the customer’s needs align with the target company’s value proposition. We also look at how effective the value-added services offered by the target are, while digging into how the customer experience matches up with the industry.
While examining the customer, we also look across the value chain within which it operates. To do this, we directly reach out to and gather feedback from key suppliers and merchants and understanding how strong the company’s existing relationships are and how its products and services are perceived.
4. The business plan
The business plan is a crucial element of the due diligence process. We want to understand the underlying financial assumptions that the company’s plans are based on and how feasible the plan is overall. We examine the key performance indicators (KPIs) of the business, which would include the customer economics – what the customer acquisition plan is, what are the costs involved, what are the usage rates, unit economics, and more.
No business plan assessment is complete, however, without also examining what the key risks are, and where the plan needs improving. We look at it both internal risks, as well as any external threats that may exist or are around the corner.
Lastly, we look at any synergies that may exist with other companies in the investors’ portfolio or other targets under consideration. This could be in terms of the product, sales, operations, technology, risk management, or any other opportunities that the investor could leverage in the near future.
Through these five stages, we are able to provide a comprehensive report on how the target company is positioned commercially and can accordingly make recommendations that influence whether our private equity, venture capital or corporate clients choose to invest in a target company or not.
Technical Due Diligence
Technical due diligence involves a deeper understanding of the technology used by the target company. We conduct a very detailed analysis of the underlying technology platform and infrastructure and examine its architecture, scalability, flexibility, resilience, and more.
Again, we’ll break it down into five key segments:
1. Scalability assessment
Scalability is a vital factor to ascertaining the health of the company’s technology. In many instances, especially when the target company is in earlier stages of its growth, the infusion of capital might be like pouring lighter fluid on a flame as the company spends on user acquisition and scaling up.
To ensure that the target company can handle this increase in activity, we assess how adaptable the company’s technology stack is, and whether it can handle multi-fold increases in volume. We check on the hardware and the software, as well as the technology infrastructure the company has in place. We outline where improvements have to be made, and highlight where a good foundation has been laid, so that our client knows that the target company can handle rapid growth that is expected from the investment.
2. Security and compliance
In our technology-centric world, security is a major concern. There have been several data breaches in the recent years, and any technology-based company needs to ensure it has secure data protocols. We assess their security and data protection system against global best practices, call out any deficiencies and recommend changes.
Equally important is ensuring that the target company is compliant with industry regulatory requirements. While technology is changing rapidly, regulation in financial services is evolving as well. For example, depending on the nature of their business, a payments company needs to stay on compliance with PCI, EMV standards, PSD2, SCA, GDPR and much more! This can be tricky as regulations tend to vary by geography. With our extensive experience in this sector, we know what regulations to track and how to assess compliance.
3. Infrastructure and architecture assessment
It’s important for our clients to know how robust the target company’s technology is. We analyse the company’s hardware and software, as well as their network and infrastructure. We also assess the integrity of the licenses the company holds
Another important factor when assessing a technology platform is its flexibility, i.e. its ability to easily integrate with other technologies, and how easily it can adapt to developments in technology that could require new builds and upgrades.
4. Resilience and business continuity
Today, we are dependent on technology for most activities and transactions. Therefore, anything that could disrupt the delivery of that service poses a risk to the entire business. Alongside assessing the company for security, we also assess the company’s ability to bounce back from disaster and keep business running despite external obstacles.
We also check how strong the company’s backup policies – how secure is the data, how easily can it be restored, and how frequently the data is backed up. This helps provide a clear picture of how the target company has planned for eventualities, which is, in turn, an indicator of the strength of the company’s leadership.
5. Customer Support
Lastly, we examine how the customer interacts with the product. We gauge their usage, the frequency, and the experience they have. We also assess how quickly customers can receive technical support and solutions to issues raised, as well as the quality of the service provided.
We also do extensive analyses of the quality assurance and testing process to ensure that the customer receives the best version of the product.
Technical due diligence requires a specialized touch. It requires the consulting firm to have the knowledge of the sector to be able to accurately understand and assess the target company’s position in the market.
At Penser, we have developed the industry expertise to be able to provide our clients with the guidance they need to make informed decisions in the banking and payments sector. By going through the five key stages mentioned above (as well as a few others), we provide a clear, comprehensive report that outlines the strengths and weaknesses of the target company.
If you’d like to learn more about due diligence services, please contact us by clicking here.
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