The most prevalent mechanisms of ownership transfer in a M&A transaction are either through the acquisition of shares or assets. In both scenarios, whether the list of customers carries a relative importance will depend on the industry where the subject company is operating
In the service industries where the revenue stream is recurrent and committed through medium to long term agreements with a portfolio of customers, the management of attrition after the acquisition become one of the critical success factors of the deal.
Optimizing the post acquisition synergies from a list of customers is even more important if the fair market valuation approach backing the transaction was based on a multiples of past or forecasted revenues.
Notwithstanding the importance of maintaining a satisfactory standard of services or products to the new portfolio of customers, the focus of this article is to analyse other key initiatives that should be deployed in tandem with the service excellence, before and after the completion of the acquisition
The concept of “garbage-in garbage-out” is also true here, therefore it is important to have a holistic view of the way we assess the synergies expected from a list of customers.
I would like to point out that the list of customers is not the only synergistic reasons that justify the completion of an acquisition, other factors like the strategic benefits (market, segment expansion), the acquisition of know-how, vertical or horizontal integration and the elimination of a competitor carry more importance in the acquisition decision making process.
That being said, below are some of the key validation that can help the achievement of the maximum benefits from a list of customers
Are the data fitted for the digitization of the customer service?
Simple details like email addresses can make the difference in moving to paperless interaction with customers as well as deploying digital payment and cash application solutions, thus gaining efficiency of cash flow, credit management and order to cash processes smoothness.
- The quality of the customer master data
The acquisition of a list of customers is an acquisition of data. Therefore, it is important to assess the accuracy and completeness of the information purchased.
Some simple questions to ask when evaluating a list of customers may include:
Are the customers’ data derived from a CRM system?
If yes, then there is a high likelihood of completeness and the structure of the information may facilitate the usability with traditional data analytic tools. Otherwise, if the acquired company does not use a Customer Relationship Management type of tools to handle the interaction with his customers then the following questions should be rigorously assessed.
How robust was the customer master data review routine?
If there is a scheduled /routine customer master data revision, then the sold information is probably accurate. Last minute customer information updates when the sale process has started should be reviewed with care because the risks of data garbage are high in such circumstances
Moreover, the answers to the above question before the completion of a transaction may be the base of a discount on the requested price during the negotiation because a weak customer master data may require the new owner to spend more money before being able to use it appropriately after the acquisition, therefore it might be important to reflect that cost in the buying price.
2. The (DSO) Daily sales Outstanding
The DSO is a well know key performance indicator used to assess the effectiveness and the efficiency of the Account Receivables management in many companies. It is the ratio of account receivables versus credit sales converted into days.
It is not only a good indicator of the velocity of the cash cycle (the time it takes a dollar invested into a product/service to be converted into cash from sales and the ability to pay suppliers in an optimal timing.) but also the level of financial/credit risks attached to the customer portfolio
3. The existing credit policy
The credit policy is a set of rules that govern the management of credit sales to customers with the aim of minimizing the financial risks of such transaction, improve the management of cash flow in tandem with the delivery of high commercial/sales targets.
It is therefore important to assess your policy with that of the subject company in order to define the scope of change that the integration of both portfolios will mean for the new customers
I am not an advocate of keeping the new customers with the same rules if they are inefficient or may affect the ability to achieve the expected synergies. Action is key!
If the acquired mentality can be a constraint to delivering of the objectives of the transaction, then an appropriate change management plan should be implemented to migrate the whole portfolio to the most advantageous standard.
The timing and the timeframe of such migration will depend on the complexity of the issues and the uniqueness of the subject company (industry, competition, agility and objectives).
4. The customer service Charter
The purpose here is to check the compatibility of the customer service and how much of a change the transaction will mean on a customer satisfaction standpoint.
The guarantees, return policy, after-sale policy may cost volume no matter the quality of services or products provided if they are the key driver of the actual customers loyalty and retention strategy.
Identifying and understanding the key differentiation that drive the customer retention/loyalty of the customers in the acquired portfolio is fundamental.
They were originally buying from that company for a reason!
As a matter of conclusion, whether the transaction involves the acquisition of shares or assets, the list of customers is usually a separate line in the Fair market value of the subject company. The level of importance of the list of customers in achieving the expected synergies is a function of the uniqueness of the subject company
Moreover, if the transaction value and the price is derived from a certain multiples of past or forecasted revenues, he becomes even critical to make sure that the list of customers not only fit the recipe but also deliver the cake!