April 30, 2019

5 Best Practices in Conducting Customer Due Diligence

Secondary buyouts (SBOs) have been on the rise over the last two decades, and even more so in the last two years. SBOs now account for nearly one-third of all deals and more often than not, these deals come with a premium attached to the purchase price. According to Pitchbook, this premium now averages nearly 14%. Pitchbook hypothesizes that these premiums are attributed to the shifting profile of firms seeking SBOs: larger firms with more dry powder, increasing pressure from limited partners to deploy capital, and favorable macroeconomic conditions.
Kay Cruse
Vice President of Customer Experience
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While financial due diligence shines a light on past financial performance, it doesn’t necessarily provide a clear indicator of future balance sheets. Customer due diligence can help fill this gap by not only identifying future revenues, but also uncovering new organic growth opportunities that might not be otherwise evident.

Conducting in-depth customer interviews, often referred to as the Voice of the Customer (VOC), can also help identify any risks associated with customer concentration or competitive threat.

The five best practices when conducting customer due diligence:

  1. Interview a wide range of customers

    Top customers? Absolutely. But target underperforming accounts as well. Go beyond the main contact and interview other functions within the business. Look for key decision makers and other people who have strong influence or control over the account’s relationship with the target company, including procurement, R&D, technical, or service people.

  2. Hire a professional interviewer

    If conducting interviews with an in-house team, the acquiring team is obligated to identify that a transaction may be occurring. Commercial diligence team’s range of questions tends to work at validating other available research and may not be as telling about the customer relationships. A professional interviewer, on the other hand, will be not only objective and neutral but also be able to draw out more information, insights, and nuances as a result of their expertise.

  3. Identify what to ask

    Ratings on performance issues and insights on strengths, areas of improvement, and Net Promoter Scores are all very valuable. But to identify the deal’s greatest potential, go beyond a health check. Useful questions to ask include how the customer include how easy the company is to do business with, how quickly they resolve problems, how they engage with customers, and how they perceive the target company’s ability to be a partner and help them achieve success.

  4. Look to the future

    Use the interviews to uncover unmet needs and determine how well does the target supports the customers’ innovation efforts. Even better: suggest product or service enhancements that are on the drawing board to gauge customers’ real interests.

  5. Turn insights into action

    A solid VOC will give you the first step in creating a joint strategic plan with your newly acquired company’s team. It will help you become intimate with the company’s customers from day one. And that intimacy enables you and your new team to push strategic growth in addition to operational improvements. For example, if a customer mentions that order processing and fulfillment could use improvement, you can hit the ground running by streamlining and simplifying order paperwork.

Customers are more often than not highly willing – and able – to shine a light into all the dark recesses into your potential deal’s company culture, performance, and future. You just have to ask.

Access Strategex’s customer due diligence checklist here. This checklist contains 10 objectives that Strategex is asked to investigate most often in our customer diligence engagements, as well as best practices for how to combine customer diligence insights with commercial diligence findings to increase the odds of a successful transaction.

Kay Cruse is a Vice President at Strategex. She can be reached at kcruse@strategex.com.