Using diligence to prepare for uncertainty
Paul Edwards, Managing Director, Stax Inc. and Romero Hayman, Director, Stax Inc.
In today’s business environment, change happens rapidly. Customer tastes evolve overnight, policy and regulations upend markets, and both technological and business model innovation is constant. To keep up, many companies turn to acquisitions to ensure that they continue to be relevant in dynamic markets. As a result, deals have become increasingly competitive, with an ever-increasing number of bidders involved in every transaction.
The temptation arises to cut corners when evaluating deals, focusing on a narrow and select set of areas to validate and justify closing the transaction and only addressing other areas if the deal closes. Paul Edwards and Romero Hayman from Stax Inc. share why such an approach is short-sighted — and carries significant risk.
Commercial diligence encompasses many facets, including market size and growth, regulatory factors, macro-economic influencers, and competition. At its core, however, it is about understanding why a customer buys a product or service. To effectively develop this understanding, one needs to ask the right set of questions and access as much available data as possible in 3-4 weeks, triangulating across sources to interpret those motivating factors that trigger purchases.
This deep understanding is absolutely critical given the speed of change that has become today’s norm. Only two decades ago, it was reasonable to believe that the value proposition of a business as identified at the point of acquisition would still be relevant a few years down the road to deliver the ROI the investor expected. Securing this return is certainly an important consideration for strategic acquirers and an absolute must for financial sponsors.
In the present business climate, longevity of value and certainty of ongoing differentiation is rarely guaranteed. Indeed, it seems like the only guarantee is that circumstances outside of the direct control or influence of the acquired business will inevitably impact operations eventually. Weathering these times and continuing to grow the value of the business in the face of the unknown hinges on an ability to remain aligned with the customer. This ability stems from a strong understanding of the customer – an understanding that begins with a thorough diligence.
Change happens quickly; evaluate the business you are buying today as well as the one you expect to own tomorrow.
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