Go outside the target firm to find the real story
They say what you don’t know can bite you. This should be the rule when it comes to evaluating a potential acquisition. It is the unsaid and undocumented which will come back and cause delays, disruptions and costs after the deal goes through which will undermine the objectives you have for the investment. Sometimes, a little more time investigating what is not documented might cause you to cancel the deal, renegotiate the price or put in some contingency plans for post-acquisition activities. One minefield of information which should be tapped is the existing customers of the target firm.
The existing customers will have information on the quality of the products and services, problems dealing with sales and post-sales support staff, experiences with agreements, product and service shipping and delivery issues and the ease of dealing with the firm over warranties, product upgrades, maintenance and customer product queries. Tapping into this wealth of information will tell you a lot about the target firm’s culture, the quality of their products and their relationships with existing and prospective customers. In any competitive environment, growth, profitability and resilience is highly dependent on recurring business from existing customers and the willingness of customers to refer the firm’s products and services to prospective customers. Such feedback will give you the evidence to allow you to judge the quality of the revenue and profit forecasts you are getting from the vendor and will assist you to judge whether your own projections are feasible.
Watch out for undeclared commitments
Another aspect of customer interviews which is highly valuable is to compare what the customer was promised with what was eventually delivered. Outstanding work or commitments which are not documented or have not been disclosed to the prospective buyer can dramatically change the value of the investment. This would especially be the case where there were large numbers of customers unhappy with the service being performed and had an expectation of future remedial work which the customer was not anticipating paying for. You might also uncover customers who are sufficiently unhappy that they are actively considering litigation for unfulfilled commitments. This feedback can be reconciled with the written agreements to see if customers are being promised outcomes which the firm is unable to deliver or whether unwritten agreements are in conflict with formal contracts.
Customer feedback is very valuable
On the other hand, you might also be pleasantly surprised with what you find. The vendor may have undersold the degree of satisfaction of their customers or be unaware of the potential to sell additional products and services back into the customer base. A customer base which is highly satisfied can be tapped for additional revenue but can also be stimulated to provide referrals to prospective customers. Feedback might also indicate where uncharged for or bundled services might be able to be priced as separate supplies.
Whether the feedback is positive or negative, it is critical to undertake some level of independent verification of the claims of the vendors. With this data, the vendors can then be asked to address concerns and to clarify issues so that the potential buyer can arrive at a much deeper understanding of what they are taking on.