During a merger or acquisition, the diligence process is focused on risk: are there any financial indicators of failure? Companies that go above and beyond in assessing risk go beyond the financials and look at customers to uncover risks and possible opportunities. Several times, we have heard customer interviews are done infrequently at best, or many times to simply check a box.
The main reason why firms ignore customer databases during diligence is because it takes precious time during a fast-moving process. However, talking to customers during the diligence process can be incredibly rewarding. You can hear first-hand from your biggest asset if problems exist, where there might be risk of defection, and discover opportunities for growth. As you consider expanding your diligence efforts, here are three types of people you should be talking to:
- Talk to high volume / key customers. It goes without saying that you need to be absolutely certain about any risk in these accounts. In one LRC program, a very large customer had defected from a target company just before the diligence process began. The potential acquisition had not been forthcoming with this information. Losing this revenue stream significantly reduced the asking price and could have been avoided with calls to key customers.
- Make an effort to speak with smaller customer accounts. These accounts could be the key to organic growth for that acquisition target once it enters your portfolio. Find out how much these customers spend in your vertical, what it would take to grow their spend with you, and their view on existing or future gaps in the market.
- And finally, talk to the people internally who own the customer relationship. Many firms don’t consider diligence work with employees of the target company. However, internal culture is seen as one of the major reasons M&A deals fail. Do your key accounts hinge on one employee? If one person left, would the company be in jeopardy? The answers to these questions could help you strategize a re-org once the target enters your portfolio.
Talking to these three types of people can uncover risk and opportunity you might not have seen before. As you move through your deals, interview these three types of people to significantly improve your diligence efforts.
If this still seems time-consuming, consider a third-party vendor to handle your customer outreach during the diligence process. Contact us today to speak to a member of our Client Services team and find out the benefits we can offer you and your firm.