Using Sell Side Diligence to Increase Returns
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Using Sell Side Diligence to Increase Returns

By Kay Cruse, Vice President, Strategex –

Customer diligence pre-close is one of the more underutilized tools in private equity target assessments.

More times than not, it’s a “check the box” exercise that nets very little value other than understanding whether or not a customer is stable or secure. At Strategex, we’ve identified ways to use customer diligence pre-close to identify the highest probabilities of success for both growth and innovation initiatives, as well as tools to determine the likelihood of the target’s capabilities to execute effectively on those initiatives.

Private equity investors in a well-known brand of carpeting were diversifying their portfolio and had determined that the time was right to sell the company. Before launching into their pre-sale readiness strategy, they took the more unusual approach of wanting to document the value of the company soon to be sold, based on the runway for future growth that new ownership might expect. They approached Strategex to ask if a “Voice of the Customer” study would be able to achieve those two goals. The short answer: yes, absolutely.

What weʼve found often overlooked when framing Voice of the Customer (VOC) work is the ability to stress-test new products and innovations. The carpet company was an active new product producer and had more than a half-dozen new ideas at the ready. The question was, which ones would be most likely to succeed? Given the resources that would be needed to carry forward just two or three ideas, it was clear that the most logical approach would be to ask the companyʼs carpet retailers which ones they thought would have the best chance to succeed. This was a sure path to finding out how much room there would be for growth in new product development.

Critically, it was also important to assess the companyʼs ability to execute on new products. Did they have the right mix of marketing tactics and retailer incentives? How did they perform on new product lead times and deliveries? Were there any shortcomings in the relationship between the company and its top customers? What would retailers think their end-consumers would value most? These could all be addressed by the VOC initiative, if carefully crafted.

Strategex takes the approach of conducting one-on-one telephone interviews to gain content-rich insights into customer satisfaction, loyalty and – in this case – interest in a range of potential new products. The interviewers were trained in product and company details so they would be able to conduct engaging interviews – all without mentioning that a potential sale of the carpet company by its private equity investors was eminent.

The sale was highly successful – a win/win on both sides. The multiple was generous and the new buyer was enthusiastic about receiving a playbook for out-of-the-gate success upon close.

As a part of the Strategex process, once the qualitative interviews were completed, the analysts and consultant teams defined the qualitative findings and directional initiatives documenting what customers wanted, needed, expected and appreciated about their relationships with the carpet manufacturer.

In this case, we documented an industry-best score for satisfaction and loyalty – 80%. Not only was the company loved by its customers, it was respected and positioned as the industry leader. Likely, no other manufacturer achieved the same level of performance—across a variety of attributes. The case for value was looking impressive.

Next came the question, what about those new innovative products? Could any of them be home runs? Strategexʼs research documented three of the six as real winners according to the retailers. In fact, they were described as “exactly what our end-consumers are looking for.” When asked, retailers even told the Strategex researchers what they thought their projected spend might be in the new product-categories.

Bottom line on the Strategex VOC Study for this client: the selling private equity investors felt assured that they had a valuable asset to convert to sale – with one of the most important elements being the ability to document just how much space there was for future growth in new investorsʼ hands.

The sale was highly successful – a win/win on both sides. The multiple was generous and the new buyer was enthusiastic about receiving a playbook for out-of-the-gate success upon close, with the assurance that customers were not only stable, but incredibly loyal. The companyʼs ability to maintain its industry-leading premium pricing was assured because Strategex documented there was more to the companyʼs relationships with its retail customers than “being just another carpet manufacturer.” The study was far more than a “check the box” exercise. It provided a launching pad for success between two new partners: the new private equity investors and its new industry-leading operating company, the carpet manufacturer. 

Learn more about Strategex’s customer due diligence practice by clicking HERE.

About the Author
With nearly 20 years of client engagement and strategic marketing experience, Kay Cruse serves as VOC Vice President for Strategex. She provides strategic marketing leadership to the VOC practice with a background in customer research, market strategy, brand development, and strategic opportunities. At Strategex, Ms. Cruse leads VOC client engagements with an emphasis on business and marketing strategies and implementation. She assists businesses in understanding and documenting VOC issues, prioritizing strategic opportunities, and developing tactical implementation processes for maximum ROI.

© 2017 Private Equity Professional | September 29, 2017

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