No matter what industry you’re in, it’s likely that delays in the worldwide supply chain are impacting your company. For that reason, there's been an emphasis on supply chain due diligence. Companies have faced challenges in that aspect of their business, even as overall EBITDA multiples surge.
Woodforest National Bank EVP and Head of Mid Atlantic Corporate Banking Julie Dargani says she's relied on both their clients' due diligence as well as third party due diligence reporting to identify certain risks that need to be addressed in a company's third-party universe in order to make it a target desirable to buyers. Those are represented by what-if scenarios, such as what if there's a discontinuation of material goods, a key supplier fails, certain material prices continue to surge, there's a critical cyber threat or failure, or a critical infrastructure failure.
"Those are the types of risks that we want to understand and that's typically available in third-party due diligence reporting, in particular in line with a lot of that impact study being conducted," Dargani says.
Buyers, investors and financers must be able to get comfortable with the company's responses to these scenarios so they can view the multiples in relation to its risks so that the valuation can be more clearly understood.
"As long as we can get comfortable with evidentiary support behind what the supply chain risks are and addressing those what-if factors, then we'll continue to see what is going to be a very active environment, not only until quarter end but I think it'll be a continuation of activity throughout 2022," she says.
BDO Supply Chain Advisory Practice Leader R.J. Romano says his firm has seen an increase in requests for supply chain diligence from both the buy side and sell side. From the buy side, he says they're trying to understand how, if at all, the pandemic has exacerbated any pre-existing issues within a company's supply chains, issues such as poor inventory management and poor forecasting.
What buyers and investors want to see is that an acquisition target has visibility into its supply chain, as well as systems in place to monitor transportation, inventory and demand. And where companies are dealing with rising transportation costs, buyers want to know what the target is doing to try to offset that, same with capacity constraints.
"(If) they have a lot of Asia-to-U.S. ocean freight, that is not going to go away," Romano says. "You've opened yourself up to a little bit more exposure than someone that maybe gets most of their materials from Europe or South America."
Companies looking to sell that have invested in addressing issues within their supply chain could be seen as more attractive to a buyer than companies that haven't.
"And maybe that helps me get a quicker deal or my evaluation is a little bit more easily digestible," he says.
Dargani and Romano, along with BDO USA LLP Partner in Transaction Advisory Services Chad Rash and Flywheel Greenville Founding Partner Peter Marsh, discuss how supply chain and logistics issues affect such factors as valuations, the performance of portfolio companies, due diligence, negotiations, and even post-acquisition integration. Hit play on the video above to catch the full panel discussion.
