Considering you have highly paid and experienced boards voting on a strategy, $100,000s invested in financial, legal and commercial due diligence (DD), financial institutions approving huge loans and the board then assessing all the facts and voting yes with all of this expertise – how can there be such a huge failure rate?
The important thing to remember is the investors are relying upon all of these experts to protect their investments. If it fails, they are the ones who lose, not the M&A advisory firms or some of the board. It’s about who has the biggest vested interest and therefore, how are they protected?
It’s about the customer
One of the key areas that cause this major problem is in the commercial DD process when measuring customer goodwill and loyalty. Often an antiquated process follows a defined format that may not be suitable to the particular business in question. If the business in DD is a transaction-based model, that is, it’s relying on repeat business, wallet share, referrals, has a sales and marketing team, in a competitive environment that sells stuff (90 per cent of businesses), then there is a high chance the commercial DD process being applied is flawed.
The key issue in the customer DD process relates to how the process is assessing the value and the strength of the customer base. Basically, most M&A transactions are about buying customers. This is where the process often turns to custard as it’s left up to accountants to decide the strength, accuracy and value of the customer base. The simple facts are that the accountants are vital for the financial DD; their role is critical, however, the customer DD should not be done by them. It should be assessed with the correct theory, extensive experience and then the ability to make a prediction based upon the facts. Rarely is the accuracy of customer experience and loyalty, given the care and scrutiny it deserves.
Mr W Edwards Deming said, “without data, you’re just another person with an opinion”. Yet so many commercial DD assessments are made on the slimmest of data and most of it is just an opinion. If you want proof, you only have to look at the results. The facts are the truth of the situation and investors are given DD assessments that are not accurate, not because of intention, but the process is out of date. Consider the current commercial DD process is like using the yellow pages instead of Google. It is so last century.
A revolutionary approach
A recent customer DD project identified critical insights that lead to the PE firm deciding against the deal. The data showed weaknesses in the customer experience scores, mainly in the human engagement of the sales and account management teams. It identified clearly their major wholesalers did not know who their account manager was and that they weren’t aware of all the product range. The contact data for us to make interview calls was very inaccurate and poorly structured. This was impacting the degree of wallet share the business had as the competitors were deep into their market. This data linked to the executive management team and how they were to old school and not investing in quality CRM and team management processes.
The investor walked away from the deal as they wanted to bolt on their existing businesses a high-quality operation that wasn’t going to cause problems when they cross-sold products to their market. They could see an immediate issue in the culture and the need for major HR changes, this was not what they wanted to spend resources on and chose to keep searching. The key to this successful decision was that the data was available very early in the DD process (the first four weeks), they saved a lot of money and time as they discovered very quickly that the prospective business was not the correct fit for them.
The common mistake
In the common DD process, this would not have been identified and potentially six months of time wasted, and many $100,000s with it. The M&A advisory firms would have accrued a lot of cost on the wrong project, and everyone would have been working hard, thinking this was the correct strategy. The key is to remember you are buying the future revenue of the customer base, and this requires expertise in how it’s measured. The current process measures the past performance, and that’s not what your buying. It’s like driving your car with the rear view mirror.
If you’re thinking about a merger or acquisition, make sure you measure customer and culture DD very early in the process. If this stacks up well, then there is confidence to keep going, if it doesn’t, then you will have different questions to ask and most importantly the price they are asking can be seriously questioned. The M&A advisory firms cannot provide accurate feedback on the performance of the team; the best people to ask about are the ones who pay the invoices and most importantly how many of them are coming back.
Darrell Hardidge is a customer experience strategy expert and CEO of customer research company Saguity, specialising in driving revenue growth from customer appreciation. Darrell is the author of The Client Revolution and The 10 Commandments of Client Appreciation