Bringing Discipline to Commercial Due Diligence

In a recent blog entitled Pay Me Now, or Pay Me Later: Getting Due Diligence Right, I stressed the importance of focusing your due diligence process disproportionately on areas that indicate future potential rather than past performance. This is particularly true with the commercial side of the business. To that end, I use a simple commercial due diligence process involving three basic steps:

Step One: Study the Customer Buying Process;
Step Two: Understand the Current Selling Process; and
Step Three: Design Your Future Sales Model.

Note that the word process or model is used in each step. This is intentional. The commercial side of a business needs to be every bit as disciplined as the operational side. The basic lean principles of waste elimination, standardized work, and continuous improvement apply not only to the shop floor but also to finance, HR and especially to commercial systems. So too with commercial due diligence.

Step One: Study the Customer Buying Process

How do key customers evaluate and implement a purchase? How do they evaluate alternatives? How do they make a supplier selection? You can tap numerous sources for this information, including customers themselves. Either way, once you understand your future customers’ buying processes, you have a much stronger foundation to validate forecasts, in order to see if expectations are truly realistic from the customers’ perspective.
If you are merging two competitors, I can tell you from experience that your customers will not be happy and you run the risk of some share loss. The more time you spend understanding this, the better the valuation.

Step Two: Understand the Selling Process

It is important to understand all the major tasks and activities of the field sales force, which include everything from strategic negotiation to routine service. Back to the old McKinsey 7S model – do you have the Staff, Skills and Systems in place to succeed?

Step Three: Design Your Future Sales Model

Designing up-front the most appropriate post-acquisition sales model is also important. You may find this hard to believe – but you really need to know the answers to fundamental questions involving responsibilities, sales channels and territories, the amount of combined resources needed and how well current sales skills compare to roles. Answering these questions gives important input into valuation, as the sales costs for a separate sales force are quite different from a combined sales force. This process also gets the combined organization a head start on integration, as sales leaders can quickly begin implementation of the new plan after the deal closes without spending precious time contemplating the design of the sales model.
So I always push to have sales leaders on a due diligence team because they can leverage their knowledge and conduct a rapid assessment of skills and capabilities of the new team. This leads to more effective post acquisition execution.

UTV Advisors has the proven experience to help you with your merger and acquisition activity. We genuinely want to help you lay a strong foundation for success.

Bob Larson