The Private Equity for Families Blog

Face to Face: The Best Due Diligence

Dick and I have been working on a transaction for the last two months that involves a service business. One of its most critical assets is relationships between the provider and its customers. We have utilized a third party marketing firm with technical expertise in financial services to help us validate the strength of the customer and supplier relationships. That exercise resulted in a comprehensive report that gives us in depth feedback on 18 customers and suppliers.

For many private equity firms this would be sufficient due diligence. The sample size is large. The reports are detailed and the interviews were recorded so that transcripts could be reviewed for nuances and inflections. However, we chose to make this our starting place and we are glad we did.

Business Is a Contact Sport

We decided to follow up in person or by telephone with 8-10 of the parties who were interviewed and 2 who were not. What we found was that the problems were greater than the audio transcripts have revealed but that the relationships and opportunities were stronger than we had appreciated. Face to face we were able to read body language. On the phone we, in our role as prospective owners, were able to lay the foundation of a future relationship better than our third party service provider.

The picture of the problems and opportunities also became much clearer. The customers clearly want us to succeed and because they like the current relationship managers, they are unafraid to tell us where we need to improve. The message we got was crisp. We needed to invest in people and inventory to keep their business. More importantly, they told us how to succeed with them. Our competitors were equally under invested in people and parts and often did not have the same long time managerial relationships. The body language convinced us that the opportunity was great but we had to be focused and responsive. We were going to get a chance to demonstrate new habits and deliver on new promises.

99% of Success Is Just Showing Up

Most importantly, we showed up. While this seems elementary for business relationships, I am convinced that the internet is displacing the old way of forming relationships. It is way too easy to relegate a business problem to an endless email chain where it languishes unresolved. Providing emotional context with something as simple as a smile or as enduring as a firm handshake is impossible. For a new owner it is critical that the customer form an opinion. By showing up we are signaling his importance and a genuine desire to listen and communicate. That customer is important enough that the new owner will brave two connecting flights and several snow storms to elicit a scorecard. It gives us an opportunity to demonstrate the owners’ voice in support of our employees but it also says you can contact us if your relationship manager is not delivering on expectations.

We ended our three days of face to face and phone due diligence having had a few belly laughs and more than one discussion about the price/value equation. But we were optimistic about our future because in every case the customers and suppliers repaid our effort with engagement and constructive dialogue which is something unhappy customers rarely do. It is a good test to show up and see if your customers will meet with you. Those that are hiding are often on their way to another destination.

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records Founder and chairman of CapitalWorks, he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CapitalWorks or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.

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