Intellectual Capital Due Diligence
This covers four key areas of the business; the business recipe, the internal structural capital, human capital and external structural capital. The following chart shows these and the topics underlying each area:
As well as determining the current status of the business in terms of these four areas, we also look at what measures the business is taking to improve its position and what risks it faces in these areas. The intellectual capital assessment is forward-looking, as opposed to financial reports which deal with historical fact, and is therefore a much better predictor of future performance.
In performing intellectual capital due diligence, senior management, middle management, customers, suppliers, industry experts and other stakeholders such as bankers, legal advisors, insurance brokers and industry experts are interviewed in a structured manner. The results of the interviews, both qualitative and quantitative responses, are carefully collated and cross-checked for consistency and then analysed and compared against industry benchmarks. The final results can provide useful insights for both the company and its sponsor and are often used beyond the IPO issue itself, frequently being worked into future business models.
Technical Due Diligence
This aspect of due diligence doesn't apply to all IPO's. This is most relevant to manufacturing companies, infrastructure companies or high-technology companies where future earnings are largely dependent upon physical assets of some sort. For manufacturing companies, future earnings are directly related to production capacity, quality of outputs and ability to withstand (or respond to) future technological changes. The technical due diligence report deals with these issues.
Typically an industry expert would review the existing manufacturing facilities and future capital expenditure budgets against stated operating parameters and expected production volumes. The key result is a manufacturing capacity analysis. Other possible areas of investigation include susceptibility to energy cost increases, reliance on raw materials, operating efficiency and/or technological feasibility.
In the case of infrastructure companies, they are usually contractually obliged to meet certain availability criteria. Failure to meet stipulated availability criteria will not only reduce revenue it will usually result in financial penalties. The capacity and condition of physical assets, operations management and maintenance procedures are critical meeting these obligations.
Censere provides comprehensive intellectual capital and technical due diligence services throughout Asia Pacific. We have in-house technical expertise in many industry sectors and have affiliations with other experts in most other industry sectors. For more information on either of these services, please contact your nearest office.