The M&A process can be long and complex. Buying or selling a company requires meticulous planning, experienced professionals, and an appreciation of the deal dynamics involved in negotiations.
Companies that have not been involved in previous M&A transactions commonly make mistakes that result in mispricing, unfavourable terms or a failure to complete – which could have otherwise been avoided. This article describes one essential due diligence measure which buyers should be aware of.
“Customer and sales” related due diligence.
In order to understand the business’s customer base, interested parties should at minimum ascertain:
- Who the business’s top 20 customers are and how much revenue is generated from each. This will provide an indication about how concentrated their customer base is and will help flag any related risks and issues.
For example, will the buyer be able to retain the customers post-acquisition, and what would be the financial consequences if they left? Furthermore, it would be prudent to determine the current level of satisfaction these customers have with the company. - Is there seasonality in revenue? This is vital to understanding the appropriate cash flow management strategy.
- What are the company’s warranty and returns policies? Determine if there have been any irregular return patterns in the past.
- Identify how the sales team is compensated. Will the merger or acquisition have any effect on the financial incentives offered, and how will this impact the motivation of sales employees?
Management Advisors Pty Ltd is a highly sought after independent financial services firm and investment bank. Their team has extensive experience in initiating, sourcing and negotiating M&A transactions to completion.