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How Third-Party Due Diligence Can Help You Uncover Future Earnings Potential

Kay Cruse Strategex | January 31, 2018

In due diligence for earnings and legal issues, best practice dictates the use of a highly qualified, third-party assessment.  So, why not take the same path when it comes to validating the qualitative elements that support the earnings history?  

More importantly, if you had the opportunity to provide an assessment of future earnings in the same diligence exercise, how much more value could that provide to your deal assessment?  

QofE looks at past financial performance.  Many times, we’re asked if there’s a way to document future earnings potential.  The short answer:  absolutely there is.  

With few exceptions, in a third-party-assisted, detailed customer due diligence initiative, we are able to not only identify the potential for future spendbut importantly how customers believe the company ranks as their preferred supplier.  By extrapolating rank and future spend and comparing it to the target’s company’s share of wallet at the customer – something that QofE can’t find – one can build a pretty detailed picture of the future financials of a potential acquisition.

Coupled with how the company compares competitively – do they lead or lag competition – you’re on your way to identify future earnings, and also create a reasonable roadmap of potential hurdles that the newly acquired company will have.

What additional value does a third party bring?

Firstly, a professional research-interviewer is able to have an engaging and non-threatening conversation about the target company without ever having to mention that a deal is pending.   They can dig into key questions, such as:

  • What are the company’s top strengths?
  • What are its top areas of improvement?
  • Why does the customer buy from the company?
  • How does the company perform across a wide variety of customer-valued measures?
  • What would the customer most like to see the company provide or innovate to solve underserved or unmet customer or market needs?  

As important as the interviews themselves are, the most important element of a third-party’s customer diligence is the ability to pull together a complete analysis of both qualitative and quantitative findings.  This enables you to construct a strategy that is more fact-based and unencumbered by conjecture and preconceived theses.

In short, the value of third-party research is to have thorough conversations where there is no preconceived agenda. This helps you build a deep and clear understanding of what the company needs to do in order to have a more satisfied and loyal customer and what actions need to be taken to expand on growth and opportunity.

Who wins in this approach? Everyone: the target company learns from the Voice of the Customer what they need to do to accelerate growth and opportunity; the acquirer begins to have an intimate and detailed understanding of not only the target company but also of its customers in order to prioritize a 100-day integration strategy upon close; and lastly, the customer whose voice was heard and whose needs will be met.  We have found this approach often takes the sting and fear of a shift in ownership off the table.  It’s a great way to turn the page on a new beginning for both the acquired and the acquirer.

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