BE DILIGENT ABOUT MARKET DILIGENCE

Third-party researchers provide valuable, unbiased assessments

By BERT SMYERS

Gathering solid market intelligence (“market research” or “market diligence”) is a vital component of any deal’s diligence process, but it is too often given inadequate focus or neglected altogether.

Market diligence offers significant benefits to buyers, helping them to:

  • Hone valuations during the bidding process;
  • Validate the target’s assertions about market position and growth prospects;
  • Accelerate organic growth post-close by better understanding expansion opportunities; and
  • Identify potential add-on candidates.

Perhaps most importantly, market diligence can identify bad deals by raising red flags that don’t normally surface in other diligence activities. These red flags can include: customer dissatisfaction that could lead to attrition, competitive dynamics that suggest future market share loss and changes in the regulatory landscape.

Such actionable knowledge is especially important in today’s deal climate, as prevailing company valuations climb to historically high levels and the pressure to justify these rich multiples likewise increases.

Good market diligence doesn’t have to include expensive and time-consuming assessments. Rather, the exercise is tailored to focus on the key market-related value drivers in a given deal.

For platform acquisitions, a comprehensive study may be needed to lay the foundation for post-close strategic planning. However, for add-ons or smaller transactions, focusing on only a few issues is usually sufficient. Common issues include:

  • Evaluating relationships with customers: How durable or “sticky” are they?
  • Assessing the target’s competitive position: Does it have sustainable advantages? How is it differentiated from competitors? Is it gaining or losing share?
  • Understanding overall market dynamics: How is the market segmented? How big is each segment? How fast is each growing?

As mentioned, market diligence should be customized to the discreet needs of a given deal. That said, it often combines secondary research (a targeted review of existing research about the target and its markets) and primary research (information obtained directly from market participants — usually some combination of customers, suppliers, competitors and/or market experts). Primary research is collected through phone interviews and/or in-person discussions, but may also include web and phone surveys.

Critical success factors for good market diligence include impartiality and a specific skill set in collecting market insights. These requirements can make it difficult for acquirers to tackle alone.

Third-party research partners exist to fill the gap. Combining research expertise, industry experience and a bullpen of professionals with top consulting skills, research partners ensure a thorough and unbiased assessment of critical market assumptions. They consequently enhance prospects for the deal’s ultimate success.

At the end of the day, investment returns are what matter. Actionable market intelligence can mean the difference between a good deal and a great deal. Avoiding even one bad deal can mean a significant bump in a private equity fund’s ROI.

Planning and executing proper market diligence with a reputable third-party research partner is a prudent step to ensure success in today’s M&A environment.

Bert Smyers is managing partner of New Heights Research. He can be reached at 216-523-4295 or bert.smyers@nh-r.com.

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