An acquisition is often prompted by momentum and the occurrence of an opportunity. All too often, this results in a financial, tax, social and/or environmental audit which does not first address the underlying foundations of the company. It is easy to believe that you know the business or the company in question sufficiently to focus on speed or cost-saving measures. The truth of the matter is, however, that you will lack the foundation upon which to make a good valuation: an objective view on a (possible) transaction.
Customers still make sure that the investment can be paid back, staff can stay motivated and shareholders receive dividends.
In the end, current and future customers of existing and new products & services must be reached through the right channels and be enticed to pay for the offer.
To ensure that a company remains successful, you have to understand first and foremost how healthy the commercial basis of the company is.
And to anticipate the future, it is necessary to understand history:
- Who are the customers? How loyal are they? What alternatives do they have? How many customers have left, and why?
- What does the product range look like? How important are NPDs? What is the share of new products to the turnover and margin contribution?
- What are the profit and margin contributions of each sales channel (direct/indirect, online/offline) and of each product(line)? Does the company use these insights to adjust its strategy?
The projections for the future are often at odds with the company’s historic commercial track record.
There are two main reasons for this:
(1) The business plan is insufficiently substantiated. The main causes are:
- Too optimistic assumptions regarding potential customers, turnover, margins per customer or the willingness to change suppliers.
- Too favorable assumptions about the development and go-to-market of new products & services.
- An underestimation of the efforts needed to realize the plan (for example through investments in marketing, sales, the organization, …).
- An overly narrow definition of the competition. Today’s competitor is not necessarily the same one as tomorrow’s, and he probably is not hiding in one’s own backyard. The internet has opened new doors.
- The business plan is not supported by the people: management, shareholders and employees are not on the same wavelength.
(2) The specific knowledge and expertise already present in the company are not documented. This can lead to surprises when shortly after the takeover, (unidentified) key people leave the company and a vacuum is created. That is why it is important that you check whether all core competences are buttressed and that key people will stay with the organization until the transitional process is complete.
5 crucial questions you need to ask during a commercial due diligence
- How attractive is the sector that I am looking at in the medium term?
- Can the company in question remain a relevant player in the market and generate profit/cash in a sustainable way?
- What are the possible up and downsides of the proposed business plan?
- Does management have the competencies to implement the plan?
- Are the customer contracts adequately documented so that there is no short-term risk? In other words, do the contracts contain clear agreements on delivery conditions, payment terms and possible discounts?
And on a more practical note… How expensive is a CDD, and what is the lead time?
Speed is key for an acquisition. Thanks to a team-based approach with experts, a report can be delivered 3-4 weeks after the start-up.
And the cost? A soft diligence starts from € 25K. The best insurance premium you can take to avoid possible disappointments!
By Jan De Lancker, founder BrainTower & Commercial Due Diligence expert.