Dig into the Buzzwords…Early
Effective commercial diligence processes don’t boil the ocean - they focus on the most critical issues in a timely manner, and in an optimal order. One of the biggest barriers to doing so is the pitch’s use of buzzwords.
I put together five examples of costly, non-obvious, buzzwords often presented by management and bankers - and my suggestions for what you should probe for early, in response to these pitches:
- “We win on quality”
- What does quality mean – specifically? What does the company do that others can’t? Why? At what cost?
- Is it…product/service attributes – proven results that exceed competition, meet challenging technical requirements, reliability, durability, style/aesthetics…?
- Is it…sales process attributes – sales rep capabilities, technical support, availability/lead times…?
- Is it…post-sales service – order processing, order fulfilment, troubleshooting, billing admin…?
- Do customers (and the most valuable ones) drive choice based on this? How does it align to how customers define quality (in the context of choice), and do they distinctly credit the company for reliably delivering these qualities? Are the customers rewarding the company as management claims?
- “[X%] of our revenue is recurring”
- Is this contracted recurring revenue, or only repeat purchases (unfortunately, the latter is all too typically dressed up as ‘recurring revenue’)?
- If contracted, what are contract lengths, break clauses and minimum volume/spend levels? And what are historical churn rates? For those retained, in what % of cases were preferential terms provided (e.g., lower pricing, etc.) to keep them on board?
- If repeat purchases, what are the customer segments that drive the most repeat volume, what are their Drivers of Choice, and how is the company performing (absolute and vs. competitors) against each driver?
- “We have marquee customers - e.g., Facebook, BP, and GE" (read James' GRAPH Paper from Jan 2017 on diligencing the risks of logo inflation)
- Does the company sell direct to them, or via a channel/intermediary? How long have they been a customer?
- What is the growth history for gaining share of wallet within the company?
- How senior at the customer org. are the companies’ primary contact points?
- Are these marquee customers the typical customer that the company is trying to build its business around? Why?
- Is the contract profitable (or was it a vanity sale, and/or are they a highly demanding customer)?
- “We’re the leading company with the highest market share offering [provision A+B+C]”
- For each of A, B and C, what is the total available market? Who buys them – what are the other communities we’re not talking about?
- Do most customers purchase A, B and C together? Why is being the leader in this combination so valuable?
- “Customers are not particularly price sensitive”
- Is the company realising greater pricing than competitors? Is there an opportunity to?
- Why aren’t prices higher?!
- And, what pricing are we talking about? Differentiate
- Upfront purchase price or ongoing revenue streams
- Regulated vs unregulated aspects of provision
This is just a subset of the buzzwords actively promoted (have you been pitched a business with a “proprietary approach” anytime recently?) - and by my measure, there are many obvious, but insufficiently useful ones (e.g., “the Uber of …”).
These often sound powerful but often lack sufficient meaning, making it hard to identify what the critical significance is – and the longer it takes to get to the true meaning of the buzzwords, the less effective the diligence process.
In the best case scenario, you discover the true meaning late (but still discover the red flag or hidden gem in time). In the worst case scenario you miss something critical, which can lead to an underperforming deal. Understanding the real essence and getting to the specifics early drives time savings, a better commercial diligence scope and leads to analysis that surfaces the key issues that prove to matter.
In the end, I have found that the buzzwords can serve a great purpose...they sometimes serve as a tell, and bring to light a case of a promoter working a little too hard to dress up a story that may not be as attractive as the proposed multiple warrants.
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