Conducting financial due diligence is standard practice in today’s deal market. The typical scope of due diligence entails an in-depth review of financial statements and their related components. While this approach is useful in providing a clear picture of summary level historical performance, it will often fall short of painting the entire picture.
Failing to uncover significant operating and financial performance drivers can put a deal and investors at risk, which simply isn’t necessary today. With all the data that is being collected buyers and sellers alike are able to drill down deeper into key business drivers. Some dealmakers are opting to expand their diligence scope by performing an in-depth assessment of customers, product revenue and corresponding profitability in tandem with their standard due diligence.
Transactional-level data is typically captured by businesses of all types. In fact, according to Forbes, data is growing at a faster rate than ever before and by the year 2020, about 1.67 megabytes of new information will be created every second for every human being on the planet. The question is, how can you make this data work for you?
This data can be transformed into information that allows users to gain a deeper understanding of both the internal and external factors driving company performance. Whether you are a buyer looking to expose significant risks or untouched profitability opportunities in a potential acquisition or a seller trying to correctly position a company for sale, a profitability assessment can provide insights into trends that unlock real value.
Prior to the practice of using data analytics to investigate transactional data, potential buyers would review profit and loss statements and trial balances without the detailed understanding of what areas of the company were performing and where there were weaknesses. Using data analytics, buyers and sellers alike can drill down deep into the data allowing them to answer questions in ways they have never been able to before, such as:
- What customers are we at risk of losing?
- What is the real customer retention rate?
- Why are certain geographic markets underperforming?
- What is our current zip code footprint?
- What products and services are creating the most and least margin?
- Are products priced correctly?
- Which end markets are we failing to penetrate?
- Does our product portfolio contain the right mix?
Being able to answer these types of questions allows buyers to make informed decisions about where the business is headed and why.
Additionally, while no one likes to see a deal re-traded, it’s important that buyers negotiate deal terms with as much undisputable information as possible. Very often by using data analytics to complete this deep drill down, negative trends in a business are uncovered providing the buyer leverage to negotiate a fairer price. Negotiating from either side of the table in today’s deal market without this deeper level of information can be dangerous, and you can run the risk of never realizing value that is sitting just below the surface-level details of your data.