Commercial Due Diligence and Value Generation via Network Effects
Many attractive investments are predicated on network effects – these are businesses that connect users, buyers, and/or suppliers. Companies like Visa, eBay, and LinkedIn have famously enjoyed the benefits of network effects to accrue immense, highly durable value. Outside of software, businesses such as recruiting, retailing, media, health provider networks, and many others, enjoy network…
Price Sensitivity and the Opportunity to Improve Margins
Most commercial diligence projects will query the channel and the end-customers to measure price sensitivity. Most CIMs will have a graph indicating the degree to which customers are, or are not, sensitive to price – and suggesting room for margin enhancement. However, relying on customers’ or the channel’s expression or “vote” on price sensitivity can lead to false commercial diligence…
Uncovering a Platform Play
The common case: The target asset (i.e., the target company) has a demonstrated track record of running a good business, enjoys healthy margins and some nice growth. The research indicates that drivers of demand are strong and sustainable. But the diligence also surfaces the fact that none of the providers, including the target company, have a materially differentiated solution – and the market…
Indefensible (Competitive Position)
I’m am fairly certain that just about every commercial diligence assignment conducted is going to include measurement of the asset's commercial strength relative to customer needs and expectations, and relative to perceptions of competitors and alternatives.
Strength of Demand vs. Strength of Brand
What is more important when looking at a deal: the strength of demand drivers, or the strength of the target company's brand equity? With rare exception, Demand – not Choice (brand equity among suppliers) – is more fundamental to a successful acquisition outcome.
Many Private Equity deals involve a “platform and add-on” play – predicated at least in part on “bigger is better”. Among the various benefits of consolidation, some of the most commonly cited value gen opportunities relate to bundling and cross-selling. Just this year, we’ve worked on deals from building products to processed meats where this has been a key part of the investment…
When Things aren’t Quite what they Seem - Distressing Commercial Due Diligence Close-calls
I thought I’d share some instructive discoveries we’ve had in commercial due diligence recently. I’m curious to hear yours. If you’re inspired, send me a quick reply with a couple of diligence events that surprised you (and that you hopefully caught). Here are a few from the past year: