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You Haven’t Completed M&A Due Diligence Until You Know a Target’s Material Margin
Engagement Manager, Adam Sidor, recounts five pivotal insights from his work in customer due diligence. Discover what he has learned from conducting over 1,400 customer interviews across 90 engagements.
As an Engagement Manager at Strategex’s Customer Diligence practice, I have been privileged to peel back the layers of numerous target accounts, uncovering not just their operational metrics but the backbone and heart of their customer relationships. I analyze a wide variety of company metrics ranging from the certifications on rocket parts to the ease of scheduling lawncare service and even lead times for catheters. I've had the opportunity to conduct over 1,400 customer interviews across 90 engagements, each unveiling invaluable lessons that transcend industries. Here are five pivotal insights from my work in due diligence that have not only shaped my approach but have also driven substantial value creation post-transaction.
A manufacturing company was being acquired, and we initially believed there was manageable risk associated with the customer base based on the Net Promoter Score. The NPS was in line with industry benchmarks, and the Company had distinct drivers of loyalty such as high-touch customer service and superior lead times. Only a handful of customers were Detractors, citing longer than expected lead times and slow responses to inquiries. However, once we weighed the data proportionate to revenue, the NPS dropped to single digits and the story took an alarming turn: their top, critical accounts were extremely dissatisfied, but the data was skewed by an excess of happy, small customers. These small customers were satisfied because they were being treated like first-class customers and receiving orders on time. But the Company was doing so at the expense of the largest, most profitable customers. The handful of Detractors represented a substantial amount of revenue: 40% of the revenue base was at risk! Post-close, by improving lead times for top customers, the Company was able to grow wallet share and solidify loyalty for the customers responsible for the lion’s share of revenue.
We supported a software engagement where the low NPS alone would suggest a high risk of customer attrition. However, many customers considered the solution to be a must-have due to a unique feature set and stated they were very likely to retain the Company due to a lack of viable alternatives. The barriers to loyalty were addressable, and the Company still had time to fix the issues before any competitors caught up. The feedback from the in-depth interviews allowed the development team to focus their efforts on the specific issues plaguing top customers, leading to increased customer loyalty. For those Companies operating in a crowded competitive landscape, gaining customer feedback is that much more important to understand why customers still choose to work with the Company. Customer decision journey mapping can be an important insight to gather during the diligence process to guide the go-to-market strategy post-close.
Teams are frequently fixated on finding out their share of wallet with customers. They ask: How do we grow from 60% wallet share to 70% wallet share? What level of discounts would be needed? What lead times would get us those wins? They may not realize they are leaving money on the table by focusing on the wrong metrics. Getting direct customer feedback can help us expand beyond the metrics we meticulously follow each day. For instance, a safety device distributor proudly considered themselves to be a one-stop shop, and our research validated this belief. Few customers could identify any gaps in offerings, and the Company received high marks for their range of products and brands. We also heard praise that this distributor was so knowledgeable and responsive that customers reached out to the Company for support rather than the OEM. Once we probed deeper into this aspect, customers mentioned there are opportunities for the Company to expand their product support and repair services and helped create a roadmap for accretive services revenue. So while the Company struggled to grow wallet share through the introduction of other products, it was able to grow the size of the pie through services spend.
We often hear management teams believe their lead times and delivery performance meet or even exceed industry standards. Their KPI scorecards might even have data to prove it. For example, when we researched one such company’s customer base, we heard the Company was falling short on lead times—contradicting what they expected to hear. When diving deeper, we learned a top end customer needed a crucial OEM part to keep a factory online and the Company could not provide the part in time. Although the Company’s KPI dashboard read that on-time and in-full delivery occurred 95% of the time, missing a crucial delivery for one client tarnished customer perceptions. Ensuring top customers have access to their mission critical parts trumps delivering smaller, less significant orders to smaller, less strategic customers. Until KPI’s are segmented by top customers and the trailing tail of customers, we cannot solely trust self-evaluations of lead times.
While we conduct in-depth interviews with a target’s customers during the diligence phase, we encourage management teams to use this as an opportunity for value creation, not just for due diligence. We recently worked on a business services deal in which the target’s NPS significantly trailed industry benchmarks. If all we cared about was capturing the score, we would presume the score implies there is some risk of attrition in the revenue base. When we started probing about barriers to loyalty, we learned the Company offers a differentiated solution and customers had an appetite for more! Customers provided exactly which capabilities they desire to make them Raving Fans. We can get better all the time at everything we do, but we don’t know where to focus unless we ask.
The key to unlocking growth potential in any transaction lies in the ability to listen—and listen generously—to what customers are saying. Whether it's improving NPS evaluations, salvaging crucial relationships, or innovating beyond current offerings, the insights gleaned from thorough customer feedback are vital. As we navigate the complex landscapes of M&A, remembering that perception often equals reality for customers can guide us toward exceeding expectations for the accounts that matter most, and in doing so we safeguard the relationships and amplify our opportunities to grow. It does not matter if the target company is a niche software firm or a run-of-the-mill (pun intended) sawmill—regardless of industry or company size, asking the right questions remains our most powerful tool.
CDD ROI
$21M
Avg. Savings Per Deal (When Issues Are Uncovered)
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