In today's highly competitive and results-driven acquisition world, customer due diligence has evolved from a financial practice to a strategic necessity. It's not just about verifying customer intentions and assessing risks; it's about gaining valuable insights that can shape your business strategy. While it's often seen as a compliance measure, customer due diligence goes beyond ticking boxes on a due diligence checklist.

Amidst the complex web of financial and legal obligations in due diligence, customer due diligence is sometimes overlooked. However, well-executed customer due diligence research can do more than just support business valuation and risk management. It can unearth growth opportunities that are often overlooked. In this blog post, we'll delve into the unexpected benefits of thorough customer due diligence research in the pre-acquisition process.

Mitigating Financial Risks

Customer due diligence is a powerful tool for risk management. It can identify potentially vulnerable customers before the acquisition, allowing you to reassess the value of the organization. It's not just about spotting high-risk clients; it's about understanding strategies that can avert potential crises. In competitive situations, the ability to foresee potential share loss can be a game-changer. Once the deal is sealed, you can direct your resources toward specific competitive situations, enhancing control over potential risks and increasing operational efficiencies.

Through customer due diligence, acquirers can understand the value of the customer base and determine the likelihood of achieving the projected revenue levels often exaggerated in the Confidential Information Memorandum (CIM).

Improving Customer Retention and Revenue

Customer due diligence provides a deep understanding of the targeted company’s performance level on key product and service attributes, performance relative to competition, and the importance of each attribute relative to satisfaction and value. By measuring these variables, acquirers can predict retention and develop strategies to improve retention and grow revenue.

Understanding the customer also allows for anticipating customer needs, enabling businesses to respond to and anticipate their customers’ evolving expectations. This provides critical insights for acquirers to develop customer-driven revenue growth strategies to enhance future revenue growth.

Aligning Business Operations to Customer Needs

At the heart of customer due diligence lies a profound opportunity to align business operations with the needs and expectations of the customer. This alignment is not a mere adjustment to market demands but a strategic alignment that places customer insights at the core of operational decision-making. Through a diligent analysis of customer data, acquirers can identify patterns and preferences that inform product development, service enhancements, customer engagement strategies, and, ultimately, revenue growth. This approach ensures that every facet of the business is fine-tuned to address the specific requirements of its customer base, leading to increased satisfaction, loyalty, and optimized revenue.

By plotting attributes on a grid framed by performance (horizontal dimension) and importance (vertical dimension), the true story of the company’s improvement needs will emerge. In the upper right-hand quadrant of the grid—or map—are attributes that are rated relatively high by customers and are important to them. We call these “market levers” because, more than other attributes, they create long-term positive satisfaction and loyalty.

There are other attributes where the company is performing well but are not evaluated as being quite as important; we call these “table stakes” because they define expected performance and are not key differentiators. Management can examine these areas of performance to see if 1) resources could be carefully shifted away to more important areas of performance and 2) the sales force could work to help customers realize the benefits they were reaping from these services.

The left side of the performance improvement map shows attributes rated relatively low—labeled improvement priorities or opportunities, depending on their level of importance to customers. Of particular interest are those attributes rated below average in performance and high in importance. This quadrant is labeled “Improvement Priorities.” The quadrant labels help categorize attributes and clarify company performance.

Another area of focus is alignment—is the company performing well on things that matter most to customers? The Performance Improvement Map is a powerful tool for quickly categorizing various functional and operational areas of the business and identifying areas that are out of alignment with customer expectations.

Fostering Stronger Banking and Financial Relationships
Customer due diligence is a bridge between enterprises and financial institutions, a verification tool that reassures banks of your business's commitment to compliance and meticulous risk assessment. When banks and financial partners observe a company's dedication to thorough due diligence, it elevates the company's standing in their eyes, fostering a relationship built on mutual respect and trust. This enhanced relationship is not just symbolic; it translates into tangible benefits for your business. Access to more favorable lending rates, improved credit facilities, and opportunities for financial collaborations become more accessible, facilitating a smoother financial journey for your business. As your business demonstrates its commitment to these practices, it aligns itself with a commitment to deliver customer value and sets the stage for a more consistent financial future. Thus, customer due diligence becomes foundational in nurturing a financial partnership, paving the way for sustained business growth and stability.

Conclusion

Customer due diligence is often underestimated in terms of the value it can deliver when acquiring a business. Prior to the acquisition, it can help determine the true value of the acquisition based on the likelihood of reaching revenue projections. It is an invaluable tool post-acquisition, as it can assist in developing customer-specific strategies and an overall market strategy and align the business to deliver value to the customer base and consistent revenue.