Three Ways to Get Creative on Buyer-Side Due Diligence
Due Diligence is often perceived as an inherent necessary exercise required to capitalize an acquisition. Historically, due diligence has been synonymous with “desk diligence,” in the form of research into financials or calls to industry consultants, which rarely involve observing business operations or market dynamics firsthand.
Given the importance of confirming underwriting assumptions, validating an investment thesis and being able to measure a portfolio company’s performance post-close, it’s time to start viewing upfront due diligence as an instrument for buyers to better position an investment. By going beyond standard market reports or a third party’s slightly disconnected opinion from on the ground reality, there is a way to creatively take the pulse of a business.
They’re called Mystery Shoppers or Human Experience Evaluators, and they provide the “boots on the ground” capability to collect onsite data. Traditionally utilized to collect audit information, mystery shoppers are now being deployed to collect diligence across a multitude of industries in lieu of a deal team traveling to individual locations. Here are three ways to leverage this new data collection tool:
#1: Think Beyond Desk Diligence to Direct Diligence
Mystery Shoppers travel onsite on behalf of consultancies, PE firms, or anyone that needs to verify a claim or assertion. Direct access to what is occurring in a business real-time can provide validation that can make (or break) the case for an acquisition. Hard data collected by physical inspection of a company portfolio can answer key questions such as the current state of deferred maintenance at each facility, the overall level of morale, teamwork and efficiency on the part of employees, and direct testimony to customer service.
#2 Utilize in-person verification of market claims
Validating a company’s market share claim can prove challenging, and many times, buyers are left to rely on broad industry data that can be lacking or outdated. By taking a cross-section of a company’s footprint and comparing it to its respective competitive set, a company’s market share claim can be evaluated. The sample size can be tailored to gain different levels of statistical validity and geotagging can confirm the individual locations around the country.
Simultaneously, in-person visits can also be leveraged to collect a wealth of other data, such as onsite product mix, market saturation of a competitors’ products or the prominence of a brand footprint within a retail environment. These data points can provide direct insight into the market positioning of a company and how well their current strategy is capitalizing or failing in the face of these market forces. Additionally, onsite data findings can be used to firm up underwriting assumptions and validate or dispel a company or its advisor’s claims.
#3: Deploy a post-acquisition strategy before the acquisition
Collecting such valuable data onsite can also inform and shape a post-acquisition action plan to address items identified through the diligence process. The initial findings established during the upfront diligence can become the baseline to track performance moving forward, which can be shared with management teams and the company’s board to help shape the go forward strategy.
Let’s say mystery shoppers uncover a disconnect during a customer’s journey, as they are handed off from one employee to another at a business location. New employee training can resolve the issue once the purchaser steps into the business. By identifying this lost opportunity for sales in advance, it can potentially direct the final offer structure and result in top line and/or gross margin expansion once the new process is put in place.
Mystery Shopping can be leveraged into a cost-effective and time saving due diligence tool, which buyers can utilize to uncover opportunities or threats that can determine the final deal structure, post close action plan and overall investment returns.
Andrew Day is President and Partner at SeeLevel HX.
