Combine Customer and Commercial Diligence to Maximize M&A Success

due diligence

Going into a deal — especially when starting to build a new platform — it is imperative for acquirers to gain a deep understanding of a category. Commercial due diligence is effective at helping acquirers familiarize themselves with a category at a high level. Often relying on secondary research, commercial diligence provides insights related to market sizing, the competitive landscape, category trends, and future growth estimates, all of which can be used to build a foundational understanding of a category. 

However, a broad understanding of a category may not always be enough to validate investment theses and develop value creation playbooks for a specific target company. This is especially true when evaluating a B2B target, since a more prescriptive set of feedback is required to measure and mitigate the risk of customer concentration, which is one of the leading causes of failed B2B deals.

In these situations, customer due diligence can provide acquirers with a more target-specific and actionable set of insights. Based on primary research (often in-depth phone interviews with a target’s most valuable customers), customer diligence can be used to determine the stability of the target’s customer base, identity at-risk customers, develop post-close customer retention strategies, validate future spend estimates, and serve as a critical input to effective value creation playbooks (customer experience improvements, pricing optimization, competitive positioning, etc.). 

Customer diligence may also serve as a faster and lower-cost proxy for commercial diligence when considering an add-on deal, since equity and operating partners (and strategic buyers) have likely already established a solid understanding of category dynamics.

Fortunately for acquirers, conducting commercial and customer diligence is not an either/or proposition. In fact, some of the most successful deals we have worked on are the result of a combined commercial and customer diligence strategy.

In one recent example, the combination of customer and commercial diligence helped a private equity client identify and mitigate risk factors that commercial diligence alone did not detect. After the deal closed, the client told us, “if we had followed the direction of the commercial diligence findings alone, we would have gone down the wrong path.”

To further illustrate the benefits of a combined approach, we have prepared a checklist of the ten most common objectives we are asked to address in a customer diligence engagement. In addition to outlining these objectives, we have also included best practices for merging customer diligence insights with commercial diligence findings to help mitigate risk, accelerate value creation, and ultimately increase the odds of success.

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