As the buyer in a transaction you have the burden of sifting through the contracts, litigation, and finances of the selling company. The goal of this effort is to reveal any potentially damaging information regarding the business to be purchased as soon as possible. Clever due diligence includes interviews with the company’s vendors and clients. But these cursory interviews will fail to unearth the 3-5 year story unless they are designed specifically, rigorously and to be statistically significant.
We saw this recently with a Services provider. The company has the biggest and “best” (best = pay on time) clients. On paper the transaction was a dream. The clients are in medium term contracts. The clients and company are cash flow positive and profitable, and switching costs for the clients are high. Sky high. Even better, no pending litigation, no financial pitfalls. When the clients were interviewed, they all said that really enjoyed working with the company and client services received sky high marks.
But that wouldn’t make much of a story so . . .
Have you ever watched a shopper interview?
Similar to marketing research or focus groups, an interviewer will ask the shopper what he will buy before walking into the store and then compare that to what the shopper actually buys. The list going in is not the same as the items coming out. People cannot accurately predict what they will buy. This is why almost 95% of all focus group products fail. Even very smart, capable people cannot predict what they will do in 6 weeks.
The same goes for the company clients and vendors. If you want legitimate, actionable information, you have to design the questions and the interview to allow the client or vendor to share his true intention, without realizing it.
So what about our Services provider? The company operates on an antiquated system that prevents responsiveness. Despite being very pleased (92% pleased) with current service, the clients are ready to jump ship because the company is preventing or hindering growth. Eight years of fantastic sales growth are about to come to a halt. And you can’t get that story from the financials.
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