A Quick Follow-up on Market Definitions

In one of our earlier GRAPH Papers® articles, my partner James referenced how important it is to accurately define the market when it comes to market sizing requirements. Per that GRAPH Paper, “Having clear definitions that everyone on the deal team is aligned on is essential.” Beyond supporting market sizing, being clear on the market definition helps the team better understand the target asset itself, and the opportunity that it represents. The definition will ultimately shape many important aspects of the deal, e.g., the go-to-market strategy, the composition and structure of the management team, growth versus margin improvement tradeoffs, organic versus inorganic growth choices, size of additional capital to invest in the business, and functional budgeting.

Given the importance of this topic, and the myriad process mistakes and unnecessary frustrations I have witnessed as a third-party advisor, I wanted to send a quick follow-up to that past GRAPH Papers® article to share some additional best practice guidance.

Our recommendations (all process):

  1. Before the work is initiated, have a formal discussion (and make this part of your standard work process) to determine if every team member (and deal influencer) is defining the market in the same way.

  2. Don’t ignore the nuance in differing viewpoints. Don’t sweep small or large differences under the rug just because everyone is running fast. This nuance and how people think about things will come back up, guaranteed, and it will impact everything from assessment of the size of the prize to the strategic and tactical direction on how to manage the asset.

  3. If everyone is on the same page, simply give the commercial due diligence advisors the clarity of the definition that you hold, and they can take a simple (and lower cost) confirmatory approach on the definition issue and go about the sizing exercise with all parties aligned.

  4. On the other hand, if viewpoints differ, it is an imperative to determine if the differences exist because either:

    • Simply, more conversation is needed to get everyone on the same page; or
    • The question is legitimately tricky and needs to be resolved during diligence (and defining should formally be part of the scope and as a necessary deliverable requirement).
  5. Let everyone on the deal team know what direction you are taking so everyone is aligned and expectations are equally set.

These steps will not take very long – maybe an hour or so – and can save many hundreds of hours (and untold dollars) during the period you own the asset (let alone any pre-deal team frustration). With the race to get work initiated, this best practice is all too often neglected in the heat of the sprint.

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