The Customer Due Diligence is often overlooked or afforded less importance in an acquisition due diligence; yet a company’s customers are probably one of its most important assets.
In addition to being the ‘raison d’être’ of a business, customers are major growth drivers and are one of the most important components of value creation. In acquiring a company, it is critical to understand the company’s customer base, sales pipeline and growth opportunities in order to properly assess the value of the business you are paying for as well as organize post-closing sales and marketing strategies.
Unfortunately, most conventional due diligence reviews are all too often high-level with regard to the customer base and lack the depth and precision of a detailed “Customer Due Diligence” analysis. The Customer Due Diligence is a separate exercise which should be layered onto the conventional due diligence review.
A proper Customer Due Diligence goes beyond the usual accounting and legal reviews and actually seeks out customer feedback. When done correctly, customer feedback can provide answers to many questions that would not otherwise come up in a conventional due diligence. Analyzing this information is crucial to determining the long-term value and viability of the business; the results of your findings will set the tone of your post-transaction operations.
What is a Customer Due Diligence?
In our experience, the relationship between a company and its customers plays a significant role in determining the value of a company. Usually performed by a third party through customer interviews, these analyses should:
- Assess the strength of the customer relationship and stability of the customer base;
- Benchmark the target to other similar businesses in the same market;
- Identify opportunities to grow the share of the customer’s wallet;
- Understand market trends;
- Uncover new information.
The information obtained from these analyses offer the acquirer an “outside-in” perspective known as, the Voice of Customer. This knowledge also provides leverage in establishing the acquisition value and planning for post-transaction operations.
Who Conducts the Customer Due Diligence?
As pre-closing investigations must be conducted with the utmost confidentiality, the Customer Due Diligence is best conducted by a specialized firm under the guise of a customer survey at the behest of the target company itself. Such surveys are typically done by telephone interviews and typically never arouse any suspicion that a sale transaction is in the offing.
For the customer interviews to be most effective, customers must be asked about their relationship with the company, their thoughts, feedback, and perspectives for the future vis-à-vis the company and its products or services. We have found the most efficient way, without compromising quality, is to select key customers who account for the lesser of 65% of sales or the top 20 accounts. Capturing these customers gives the added benefit anecdotal confirmation of assumptions and sets a solid foundation to develop a post-close playbook.
Sample Questions to ask:
Customer Due Diligence reveals the strength of customer relationships and their role in the value of the target. This can unlock pre- and post- transaction value through both insight and foresight. Some questions may include but are not limited to:
Mitigating the risk of customer concentration:
- Are top revenue generators loyal?
- How diversified is the company’s customer base?
- Are any top accounts at risk? If so, what can be done to retain them post-closing?
- Do customers expect to increase, maintain, or decrease their wallet with the company?
Validating the growth outlook and uncovering opportunities:
- Does the growth outlook for the category and company confirm assumptions made in the pro forma financials?
- Should the projected EBITDA or offer price be revised based on customer forecasts?
- How satisfied are customers with quality, lead times, delivery, price/value, etc.?
- What suggestions do customers have for improving these touchpoints
Optimizing the company’s channel strategy:
- Are the company’s current sales channels aligned with customer buying preferences?
- Are there emerging channels which the company has not yet identified, or in which it is not participating?
Improve win-loss ratio and reduce customer churn:
- When customers are evaluating suppliers, what are the most influential decision-making factors? How does the company perform?
- What triggers customer churn? How can it be prevented?
Strengthening competitive position:
- Which competitors are customers sourcing from?
- How is the company perceived relative to competitive suppliers?
- Are customers satisfied with the breadth and depth of offerings? Are competitors offering something the company is not?
- Do customers see trends or disruptions in the market?
The Post-Close Playbook
Answering these questions provides clear indicators for the growth of the business specific to the company. Not only does knowing this information before-hand allow the acquirer to evaluate the risk of the acquisition, it allows the development of strategies to counteract these risks well before closing. This kickstarts the value creation process, whether it is retaining at-risk accounts, growing the share of wallet, planning cross-selling strategies, developing innovation pipelines, or catering to any existing shortcomings/opportunities uncovered in the process. Having a strong grip on the growth drivers can help plan for the growth potential of the business.
When to start the Due Diligence
When it comes to Customer Due Diligence the sooner you obtain the results the better. An acquirer can be much more precise in its valuations and have more time to analyse the Voice of Customer. The earlier the acquirer can attack the issues and opportunities arising in the Customer Due Diligence, the earlier they can form a playbook for post-closing operations. Comprehensive plans can be designed to align the target to the parent business and create value post-transaction. Ultimately, the cost incurred from performing these analyses are more than compensated through the value creation potential generated through the understanding of the target’s customers.
Cafa can provide you with the right reference and resources to help you in the gathering of the information, analyzing the data obtained, and measure how it can affect the transaction value.
Additional information regarding Due Diligence is provided in our Due Diligence Checklist in our Tools section.