Customer Referencing to ensure success during Mergers & Acquisitions

Whether it's acquiring or selling a business, Customer Referencing has become crucial when it comes to verifying the validity of a transaction and reaching an agreement, most of all when the company in question is in a foreign country.
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There are many factors which have led to the major setback suffered by M&A operations in 2020. Whether the target company is abroad or to be found nationally, the fact that you cannot travel as easily as before to check the status of assets such as factories, is just one of them.  

By the middle of 2020, the prevailing opinion declared the M&A sector shrinking and even the European Cross-Border transactions recorded a sharp decrease.  

In 2021, market conditions will continue to be uncertain and many travel restrictions will remain in place however, compared to last year, an increase in transactions is expected. Whether due to the impossibility of delaying any further negotiations that have so far remained suspended, or to implement a strategy in response to the crisis with a view to recovery.  

In the United States and Europe, the high and enduring level of uncertainty has affected consumer behaviour, which is putting companies’ ability to achieve their targets in difficulty. Without the ability to grow organically, or the likelihood of achieving profit targets, companies look to acquisitions as a means to drive growth, with the added benefit that the combined scale should also improve profits.  

Among the many factors that will condition acquisitions in the coming months, the completion of vaccination programs and the implementation of the financial recovery actions envisaged by governments will certainly have an important weight. Therefore, for those who need to oversee an acquisition in the short term, it will be important to be prepared to act in a less favourable context than in the past.  

We know that in addition to remote communication technologies, the pandemic has highlighted a need for tools that can help parties to properly manage M&A processes regardless of their geographical location.  

If you have planned or are conducting a divestment or acquisition operation as part of your strategy, be it an ‘exit’, growth, territorial expansion, or vertical integration strategy, you are likely to be seeing an increase in the time required for evaluation, which makes it more difficult to reach an agreement.  

It is precisely in this phase where analysis of the target company’s customers becomes essential.  

While some of the stages during acquisitions are indispensable, such as sharing of intent, bid submission, or signing, many others may or may not be included in the acquisition journey depending on the particular circumstances or needs of the parties.  

Those acquiring may want to conduct a technical due diligence to understand the value of a technology or patent or may require the drafting of a 3 year business plan to be shared with the top manager who will need to commit to. The phases may also change based on whether the offer comes from a company or fund, or whether the strategy is linked more to technological integration or the growth of market share in a sector.  

Customer Referencing is an analysis that some in the sector consider useful but not indispensable, therefore it is not always present during the acquisition process; the presence of other elements and information is often considered sufficient to take a decision and make an offer. Unfortunately, often even in the most rigorous and complex acquisition processes, the absence of this analysis leads to the failure of the agreement or to unpleasant surprises for the buyer following the conclusion.  

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Why is a Customer Referencing survey important in Acquisitions?

The reason Customer Referencing is becoming more important now more than ever, is the growing difficulty in getting assurances regarding two factors which could drastically impact an evaluation and a successful acquisition: 

  • Customer Portfolio
  • Turnover

After considering factors such as margin (EBITDA), management, expertise and the market share of the company being acquired, you should have all the parameters within which you can evaluate the risk and make the best decision. However, this information will not indicate whether the company will grow as expected or whether it has deteriorated client relationships. When acquiring, the customer portfolio and predicted growth plan will certainly be transferred, nonetheless without a thorough analysis, you will not have certainty regarding the solidity of the portfolio and therefore of the predicted growth. 

In the case of a northern European company that needs to open a HQ in Italy and one in Spain in a short time; once you have positive feedback from the management, you may decide to do without indepth analysis of the skills of the staff of the target companies. At worst, training could be intensified and an organisational restructuring could be done. However, would you buy a company that has problems with its customers and that will not be able to grow in the upcoming years just so that you can show that you have international expansion? 

In this sector, there is a tendency to place greater emphasis on the business plan assumptions than on the testimonials offered by customers during a Customer Referencing survey. Business plan assumptions and related revenue projections will be all the truer the more solid and healthy the business relationship with the existing portfolio. We can put forward any kind of growth trend but if the target company in question has a problem with its existing customers and you are not aware of it, you too will have a problem after the acquisition. 

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How do I conduct a Customer Referencing investigation?

The methodology used in Customer Referencing is similar to a Customer Experience survey. A topic we’ve often discussed when initiating a proactive interaction with customers to understand perception and satisfaction. The main differences are: 

  • In addition to the satisfaction and perception that the customer has of the target company, other aspects related to the specific transaction are investigated including, but not limited to:

    • reliability of the budgets
    • level of replaceability in the short term
    • trend of customers purchasing plans
    • benchmarking against competitors
    • unexpected CAPEX
    • solidity of client relationship
    • perception that customers have of management and staff
  • The survey is carried out solely by a third party to facilitate the creation of a neutral environment ensuring that the data collected during the interviews can be considered reliable and impartial.

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Who should request a Customer Referencing analysis?

It is at the best interest of who is acquiring to commission this type of analysis to a third party. This is because the target company knows its own customers (or should), so it is precisely the company that is acquiring that can have a legitimate doubt about the quality of customers and the turnover it is planning to take on board.

Of course, this is not mandatory during sales and acquisition negotiations, therefore the analysis will need to be authorized by the company being acquired. However, if they do not, needless to say, knowing that the target company has rejected a Customer Referencing analysis is a sign that will have to be properly interpreted alongside of all other available elements.

The survey can be requested both by companies receiving proposals but also by those that are considering divesting shares in the short term. In the latter case there are two main advantages:

  • By conducting a Customer Referencing survey of its customers, you will gain information that can be immediately used to improve customer management, strategy and other aspects that can strengthen business results and consequently its attractiveness for an offer of acquisition in the short term.
  • You have at your disposal an up-to-date study to show potential buyers if they request confirmation regarding the quality of your customer base, reducing negotiation time.

The elements needed to conduct the Customer Referencing Survey are, on the one hand, experience in M&A’s and business and commercial due diligence market and on the other, a tested methodology that collects authentic feedback and information while interacting with the various levels of the target company. Accompanied by professionals, risk is reduced and acquisitions become a real opportunity for growth.

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