.Commercial Due Diligence.This page intentionally left blank.Commercial Due DiligenceThe Key to pdf

Commercial Due Diligence This page intentionally left blank Commercial Due Diligence The Key to Understanding Value in an Acquisition PETER HOWSON # Peter Howson 2006 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher Published by Gower Publishing Limited Gower House Croft Road Aldershot Hants GU11 3HR England Gower Publishing Company Suite 420 101 Cherry Street Burlington, VT 05401-4405 USA Peter Howson has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as the author of this work British Library Cataloguing in Publication Data Howson, Peter, 1957– Commercial due diligence: the key to understanding value in an acquisition Consolidation and merger of corporations – Management Business intelligence I Title 658.1 062 ISBN 566 08651 Library of Congress Control Number: 2005934407 Typeset by Tradespools, Chippenham, Wiltshire Printed in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire Contents List of Tables List of Figures Introduction PART I: ix xi xv THE BASICS What’s It All About? What is CDD? Market due diligence Why due diligence is badly done Using due diligence to reduce risk A definition of CDD Overlap with financial due diligence Applications of CDD Conclusion 13 15 16 18 22 31 31 Getting Started Is CDD needed? Where we start? Who should carry out the work? Selecting CDD advisers Planning the work The CDD team Timetable Fees Good CDD practice Conclusion 33 33 37 38 38 40 41 41 42 43 44 PART II: ANALYTICAL TECHNIQUES Which Market is the Target In? The basics Differentiation and segmentation are two totally different things And strategic and operational segmentation are not the same things either Strategic segmentation Products and services that go into the market Market sizing Conclusion 49 49 50 52 56 65 67 71 vi Commercial Due Diligence Industry Attractiveness Do not forget your basic economics Analysing industry attractiveness Other ways of classifying industries Forecasting industry profitability Conclusion 73 73 80 93 96 97 Which Customers is the Target Serving? Operational marketing segmentation Demographic Psychographic Purchasing approach Situational factors and personal characteristics Conclusion 99 99 100 104 105 107 108 Ability to Compete The analysis of resources and capabilities Can competitive advantage be sustained? Brand strength Distribution channels The use of IT Ability to compete over the industry life cycle Conclusion 111 111 123 133 137 141 142 145 Competitor Analysis Some common myths What we want to find out Identifying the competitor’s objectives Conclusion 147 147 148 149 153 The New Reality The beleaguered company Customer segmentation The target’s approach The sales force Beyond satisfaction ratings Using the target’s customer satisfaction measures Contract-based businesses Conclusion 155 155 156 175 176 177 180 181 182 CDD in Special Situations New technologies Diversification Assessing new business models JVs and alliances Declining industries Recovery plays Conclusion 185 185 198 199 201 208 210 211 Contents vii 10 Assessing Management Objective Reporting Communication with management Culture Conclusion 213 213 223 228 228 231 11 Using the Output Always keep the bigger picture in mind Spreadsheet modelling Valuation The integration plan Conclusion 233 234 241 254 261 262 PART III: COLLECTING AND PRESENTING THE DATA 12 Structuring and Planning Understanding the question Issue analysis Collecting the data Dealing with obstacles Other planning tips Conclusion 269 269 271 279 290 294 297 13 Interviewing Questionnaire design Tips for successful interviewing Competitor interviewing Other forms of interviewing Conclusion 299 299 312 315 318 321 14 Writing the Report Start by putting the report in context Keep the structure logical Give the answer via a logical hierarchy of issues Cover one issue at a time Group issues to make understanding easier Writing style Make sure individual contributions are consistent Produce an interim report Vendor CDD reports Conclusion 323 323 323 324 324 325 329 336 336 336 337 viii Commercial Due Diligence Appendix A Checklists Checklist 1: CDD briefing Checklist 2: A full CDD exercise Checklist 3: Marketing Checklist 4: Five Forces Checklist 5: Identifying resources and capabilities Checklist 6: Threats and opportunities Checklist 7: Determining KPCs Checklist 8: Commonly sought management competencies Checklist 9: Competency-based interviewing Checklist 10: Sample questions for competency-based interviews Checklist 11: Things that can go wrong on CDD projects 341 341 343 347 351 355 357 358 359 361 362 364 Appendix B Report Writing Words and phrases to be avoided in report writing Presenting numbers Style and report writing 365 365 367 389 Index 391 List of Tables 1.1 1.2 Contract analysis and sales forecasting Why past financial performance is not a good guide to the future 25 28 2.1 Different types of M&A and the implications for CDD 36 4.1 4.2 4.3 The spectrum of industry structures The attractiveness of the competitive environment Industry characteristics and their implications for future profits 81 95 97 5.1 Occupation as the basis for socio-economic segmentation 104 6.1 6.2 6.3 6.4 6.5 119 121 129 134 6.6 The pros and cons of a SWOT analysis The scored SWOT Tangible differentiation possibilities Aligning brand and consumer values Varieties of brand extension for a manufacturer of prams and children’s car seats The consequences of industry evolution 7.1 7.2 Observing Porter’s Five Forces in practice KPCs, CSFs and KPIs for bicycles 150 152 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 The output of a KPC interview with management Measuring relative value perception Relative value perception of a piece of software Classifying customer needs Defining product price Customer roles Scoring the four customer elements The four basic sales approaches 159 164 165 166 167 167 168 182 9.1 9.2 Characteristics of successful new products Alternative strategies for exploiting innovation and relative risk/return 187 192 10.1 10.2 10.3 10.4 Structuring a 3-hour interview Scoring individual managers on each competency Organization culture and strategy Operating versus innovating organizations 216 225 229 230 137 143 386 Report Writing A trend A cycle Seasonality A residual ‘random walk’ The general starting point is to consider which influences (trend, seasonality, cycles or inflation) are relevant for the forecast Not all will be relevant in every case The component parts may be thought of as adding or multiplying together to form the overall series (X) In shorthand, either X ẳ T ỵ C ỵ S ỵ R or X ẳ T C S R The second, multiplicative, model is more appropriate for most business situations THE TREND This is the general, long-run path of the data, probably identified using regression analysis or moving averages (see below) In Figure B.20 this is the bottom line (which is the graph in Figure B.19 with cyclical and seasonal effects removed) There is a slight but steady rise in the trend, perhaps due to growing demand THE CYCLE Sales trends and other business data frequently contain one or more cyclical components These reflect factors such as the industry or product life cycles or the general business cycle Most economies exhibit a recession–depression–recovery–boom pattern, which typically lasts for or years with underlying longer-term cycles.4 Figure B.21 shows an exaggerated cycle of about years’ duration SEASONALITY Seasonality is a very short-term pattern that repeats every 12 months (for example, increased demand for ice cream in the summer) To identify seasonality, look out for repeating Figure B.20 Target Co.’s sales (2004–06) with cyclical and seasonal effects extracted Appendix B 387 Figure B.21 The seasonal and cyclical effects patterns once the trend has been plotted Seasonality is one of the most important elements to identify when analysing and forecasting short-term developments It is best to think of the seasonal effect as a percentage of the trend, as it is not likely to be a constant, but a number that is dependent on the general level of business at the time For example, a retailer sells £1000 worth of greeting cards every month except December, when seasonal influences push card sales to £1100 Is this seasonal variation additive (base amount ỵ Ê100) or multiplicative (base amount 110%)? The answer is probably the latter, since if regular monthly sales suddenly doubled, perhaps due to higher demand or inflation, it would be more realistic to expect December’s sales to be £2000 110% ¼ £2200, rather than Ê2000 ỵ Ê100 ẳ Ê2100 Seasonality is not relevant if data are annual totals that by definition contain a complete seasonal pattern THE RESIDUAL It is rarely possible to explain every factor that affects a time series When the trends, seasonality and cycles have been identified, the remaining (that is, the residual) unexplained random influence is all that is left TRENDS Before decomposition, Figure B.19 looks like a random collection of numbers organized around a steadily rising trend CDD will often want to take a set of sales figures like these and get a quick overview of what has been going on to give some idea of what the near term may hold Moving averages is a good way of pulling the trends out of a jagged graph like Figure B.19 388 Report Writing Moving averages Moving averages is easy with a spreadsheet A 3-month moving average is calculated by adding the first months’ data and dividing by Next, move down a row by copying the @sum formula, which will drop the first value and add the after the last On you go until you run out of sets of three numbers With monthly sales data, the st point would be (Jan ỵ Feb ỵ Mar) /3, the second is (Feb ỵ Mar ỵ Apr) /3 and so on For 6-month averages, add six consecutive points and divide by 6, for 12-month averages, add 12 consecutive points and divide by 12 Figure B.22 comprises moving averages for the data used in Figure B.19 Purists say that moving averages should be centred (that is, the Jan to March 3-month average should go in the Feb slot) I would not bother myself, especially if you are using the moving average for forecasting because you will get a gap at the end of the trend If you are using moving averages for forecasting, make sure you remove any seasonal patterns from the raw data (and add them back when you have finished the base forecast) Also, when forecasting, you might wish to give the most recent numbers more weight Do this by using percentages So in a 3-month moving sales average, last month’s figure might get a 60 per cent weighting, the month before, 30 per cent and the remaining month, 10 per cent It saves extra maths if the weights add up to 100 per cent Regression analysis Regression identifies the equation of the line of best fit that links two sets of data and reveals the strength of the relationship The general approach is: line up the two series to be regressed; find the equation that describes the relationship; and test the strength of the relationship (the correlation) between the two series Figure B.22 Moving averages Appendix B 389 Essentially, regression analysis fits a line that minimizes the average vertical distance between the line of best fit and each scattered point The Excel Analysis ToolPak (an add-in for Microsoft Excel) contains a regression analysis tool MEASURING THE STRENGTH OF THE RELATIONSHIP Regression analysis provides some important indicators of how well the identified relationship works The coefficient of correlation Better known as r, the coefficient of correlation identifies the correlation (the strength of the relationship) between the two sets of data represented by x and y This coefficient will always be between À and ỵ1 If r ẳ 0, there is no linear correlation between the two series If r ¼ or r ¼ À there is perfect linear correlation The sign indicates the slope of the line of best fit Better known as r2 (¼ r r), the coefficient of determination indicates how much of the change in y is explained by x; r2 will always be between and The coefficient of determination Style and report writing When writing reports, note the following: The best messages are ‘joined up’ to others in the story and not depend on supporting data Supporting evidence must reflect the message; it must also make sense all on its own Make sure you know the correct spelling of the company/product names and the names of competitors If you are not sure, find out; not guess SOME STANDARD APPROACHES TO ANALYSIS For each market segment: compare the target’s forecast growth versus CDD estimate; state assumptions clearly; show how much growth is accounted for by the market and how much of the target’s growth is accounted for by taking market share; show market size by historical trends and forecasts; show the share of each segment by competitor; show revenues by customer groups; show what drives demand; show trends in key industry drivers Always: spell check; spell out numbers up to ten; 390 Report Writing use ‘and’ not ‘&’ (except in a company name when it is its legal public name, for example, Saatchi & Saatchi); use dashes to start a parenthetical phrase; use them like brackets, not like commas; define complex words or phrases the first time they are used in the document, then use the acronym, for example, Deoxyribonucleic Acid (DNA) (a glossary may also be helpful); company names should be defined first too, for example Procter and Gamble Inc (P&G), British Petroleum plc (BP) Never: contract words; it is ‘cannot’, ‘will not’ and ‘they are’, not ‘can’t’, ‘won’t’, and ‘they’re’; it is always ‘do not’, never ‘don’t’; use the vernacular (except in a direct quote), for example, ‘those guys’ Notes Zelazny, G (1996) Say It with Charts New York: McGraw-Hill Moroney, M.J (1978) Facts from Figures Harmondsworth: Penguin Readers are referred to Moroney’s unflinching denunciation of time series as a means of predicting the future He likens it to astrology: ‘There are many who believe in the efficacy of these things who have written about them at great length You may read their books Read them for fun and I promise you a jolly time Read them for practical profit and I promise you a loss’ (Moroney, Facts from Figures (see note 2), p 323) Russian economist, founder of the Moscow Institute for Business Conditions, Kondratieff identified the half-century ‘long wave’ in his famous 1922 tract and 1926 article (‘The World Economy and its Condition During and After the War’, 1922, Moscow and ‘The Long Waves in Economic Life’, 1926, Moscow) One of the architects of the first Soviet Five Year Plan, he was rewarded by Stalin with imprisonment in one of his Siberian camps, in which he died sometime in the 1930s Index acquisitions see mergers and acquisitions advertising (case study) 84 advisers briefing 39–40 selection 38–9 alliances see joint ventures Ansoff matrix 260–61 automotive paint (case study) 173 Baltimore Technology 30–31 banks, commercial risk 8–9 benchmarking of sales forces 176–7 bicycle components (case study) 61–2 brand strength competitive advantage 133–7 testing 135–6 brands extension of 137 image transfer 137 line extension 136–7 strength 133–7 stretching 136–7 Bundy Tubing 112 bus ticket machines (case study) 269–70 business models, new 199–201 cabling of computer systems (case study) 295 CAGR (compound annual growth rate) 371–2 capabilities of businesses appraisal 120 identification 117–18 checklist 355–6 organizational 113–15 profit potential 115–17 relative strengths 118, 120 from resources 115 SWOT analysis 118–23 scored 121–2 capital costs of market entry 84–5 capital expenditure 31 car exhaust systems (case study) 9–13 car sales by internet (case study) 140–41 cash flow 7–9 categorization of transactions 161–2 CDD see commercial due diligence checklists CDD briefing 341–2 CDD projects, things that can go wrong 364 competency-based interviewing 361 sample questions 362–3 Five Forces 351–4 full CDD exercise 343–6 KPCs 358 management competencies 359–60 marketing 347–50 resources and capabilities 355–6 threats and opportunities 357 child crisis care, SWOT analysis 121–2 children’s homes (case study) 75 chiller cabinets (case study) 34 clients 295–6 key questions 269–71 commercial due diligence see also due diligence alliances 201–8 applications of 31 briefing checklist 341–2 cost 286–9 coverage 34–7 data collection 279–90 from acquirer 280 desk research 280–82 from management 279–80 primary sources 282–6 secondary resources 280 declining industries 208–9 definition of 18–22 competitive position 21 competitor analysis 20 customer analysis 19–20 management 21 market analysis 19 diversification 198 duration 286–9 and financial analysis 256 full exercise checklist 343–6 good practice 43–4 innovation 185–98 issue analysis 271–9 hypotheses 274–7, 296 to work plan 277–9 questions to issues 274 joint ventures 201–8 392 Commercial Due Diligence need for 33–6 new business models 199–201 new technologies 185–98 recovery of businesses 210–11 role of 24–31 SPACE (Strategic Position and Action Evaluation) 236, 237 structured approach 269–78 timing of 36 types of 37 commercial risk 7–9 and banks 8–9 communication 43 company culture 149–50 competencies 113 checklist 359–60 management assessment 225 interviews 215 checklists 361, 362–3 competition 56–7, 79–80 competitive advantage analysis 111–22 brand strength 133–7 cost leadership 126–7 differentiation 127–32 disruptive change 144–5 distribution channels 137–41 experience curve 124 first-mover advantage 123–4 imitation of 123–5 industry life cycles 142–5 innovation 125 IT (information technology) 141–2 market share 124–5 positioning 125–33 quality 132–3 speed of innovation 132 sustainability 123–33 competitive dynamics 94 competitive position 21, 234–5 competitive strategies 51–2, 57 competitor analysis 20 competitors analysis 147–53 critical success factors 151–2 collection of data on 148–9, 284 differentiation 150 interviews 315–18 objectives 149–53 performance 151–2 compound annual growth rate (CAGR) 371–2 confidentiality agreements 290–91 contract-based businesses 181 core competencies 113 cost leadership, competitive advantage 126–7 critical success factors (CSFs) 151–2 cross-border transactions 291 CSFs (critical success factors) 151–2 culture, organizational 149–50, 228–31 customer analysis 19–20 customer base, concentrated (case study) 25–6 customer loyalty 177–9 customer referencing 9, 26–8 case studies 27–8 inadequacy of 9–13 customer research on sellers 291–2 customer satisfaction 177–80 measures 180–81 customer segmentation 156–75 matrix 158–75 manage risk quadrant 169–72 partner quadrant 172–5 price down quadrant 163–9 shop around quadrant 159–63 customer value propositions 175 customers buying motivations 175 data collection on 283–4 restricted access to 292–3 understanding 32–3 data collection 279–90 from acquirer 280 desk research 280–82 from management 279–80 primary sources 282–6 competitors 284 corollary suppliers 285 customers 283–4 distributors 285 former employees 284–5 industry observers 285 market entrants 286 market leavers 286 pressure groups 286 regulators 286 specifiers 285 suppliers 285 secondary resources 280 data rooms 293–4 DCF (discounted cash flow) 255–6 deal breakers (case study) 234 debt in private equity investments 6–8 declining industries 208–9 capacity 209 commercial prospects 208–9 demand 209 targeting niches 209 demand 73–6 economics 81 growth 89 price elasticity 73–5 shifts in 75–6 Index and supply 78 demographics 100–104 business-to-business markets 103–4 consumer markets 100–103 differentiation of businesses 127–32 differentiating capabilities 131–2 identification 129 intangible 129 IT (information technology) 142 positional 129 primary activities 129–30 segmentation of markets 127–8 support activities 130–31 tangible 128–9 differentiation of competitors 150 differentiation of products 50–52, 161–2 directional policy matrix 239–40 disaggregation of activities 113 discounted cash flow (DCF) 255–6 Disneyland (case study) 233 disruptive technologies 144–5 distinctive competencies 113 distribution channels competitive advantage 137–41 customer value 139 delivery by 138–9 new 139–41 distributors, data collection 285 diversification of businesses 198 due diligence acquirers 37–8 aims 15–16 commercial see commercial due diligence financial 22–31 market 13–15 post-merger integration 17 case study 17 risk reduction 16–18 timing of 15 Duropal 64–5 E-V-R congruence 122 economics demand 81 laws 73–80 supply 80–81 economies of scale 83–4 electricity meters (case study) 60–61 employees, former, data collection 284–5 experience curve 124 FDD (financial due diligence) 22–31 fees for commercial due diligence 42–3 Ferranti financial acquirers 257–8 financial due diligence 22–31 financial performance 28–9 financial risk 7–8 393 First Interstate 17 fitted kitchens (case study) 101 Five Forces model 81, 82, 94–6, 150 checklist 351–4 focus groups 319–20 focus on markets 52 forecasting profitability 96–7 forecasts (case study) 25 gap analysis 258–61 garment cleaning system (case study) 193–5 geographic segmentation 64–5 good practice in commercial due diligence 43–4 gross margins (case study) 22–4 growth share matrix 237–9 healthcare industry (case study) 160 human resources 113 industry attractiveness analysis 80–92 buyers bargaining power 91–2 capital costs 84–5 complementors 92 economies of scale 83–4 markets, threat of entry 82–5 price sensitivity 91–2 substitutes 82 suppliers bargaining power 92 industry life cycles 89–91 competitive advantage 142–5 demand growth 89 disruptive change 144–5 industrial rivalry 90–91 knowledge, creation and diffusion 90 limitations of theory 90 industry rivalry 85–91 capacity 87 competitors, diversity of 86 costs 87 exit barriers 87 gauging 88–9 import competition 86 industry life cycles 89–91 market growth 87 market size 87 product differentiation 86–7 seller concentration 86 technological change 87–8 information, commercially sensitive 291 information sharing 43 information technology 141–2 innovation 185–98 characteristics of success 187 complementary resources 190–91 demand forecasting 195–7 exploitation 192–3 394 Commercial Due Diligence imitability 191 market for 186, 188–9 and organizational culture 228–31 profitability 189–92 property rights 190 standards 197–8 timing of investment 193–5 ‘winner takes all’ markets 198 intangible resources 112–13 integration plans 261–2 Intel 144 interim reports 294–5, 336 internal rate of return (IRR) 6, 32 interviews 286–90, 299–321 access for 288–9 competency-based, checklists 361, 362–3 competitors 315–18 focus groups 319–20 management assessment 214–18 market sizing 71 methods 288 mystery shopping 320 platforms 290, 316–17 questionnaires 299–312 rules for 312–15 sample selection 287–8 segmentation of customers 159 IRR (internal rate of return) 6, 32 issue analysis 271–9 IT (information technology) 141–2 IT trade show (case study) 178 joint ventures (JVs) 31, 201–8 complementary resources 202 convergence 203 divestment of assets 204 as due diligence 204 failure of 206–8 innovation 202 marketing 202 pre-emption of the competition 203 research and development (R&D) 203 success of 204–6 trading barriers 203 JVs see joint ventures key performance indicators (KPIs) 151 key purchase criteria (KPCs) 151, 170–72, 279–80 checklist 358 KPIs (key performance indicators) 151 M&As see mergers and acquisitions manage risk quadrant, customer segmentation matrix 169–72 measuring satisfaction 170–72 management 21 assessment of 213–31 communications 228 culture 228–31 personality checks 219–21 traits 221 type 219–21 psychometric tests 219 reference checks 218 reporting 223–8 structured interviews 214–18 body language 217 context 217–18 data gathering 215–16 pacing 216 questions 216 teams 222–3 competencies, checklist 359–60 restricted access 293 management buyout (case study) 14 management interview (case study) 226–8 management performance (case study) 14–15 market analysis 19 market due diligence 13–15 market performance 29–30 market sensing (case study) 233 market share, competitive advantage 124–5 market strategy 17, 236–41 marketing see also markets checklist 347–50 mass 50–51 markets analysing 57–8 definition 49 entrants, data collection 286 entry 82–5 capital costs 84–5 focus on 52 forces acting on 235 leavers, data collection 286 monopolies, local 94 Schumpeterian 94 segmentation 49–52 benefits-based 58–9 company strategy 63 customer needs 62–3 customer technology 60 end market 61–2 geographic boundaries 64–5 operational 53, 99–110 demographic 100–104 psychographic 104–5 purchasing approach 105–8 socio-economic 104–5 proxies 59–64 size of order 59 strategic 52–65 strategic groups 63–4 Index technology 60 sizing 67–71 threat of entry 82–5 traditional industrial 94 understanding 5–6, 9–13, 32–3 mass marketing 50–51 MECE (mutually exhaustive, collectively exhaustive) 272–4, 328 mergers and acquisitions 234, 236 cross-border 291 reasons for 35–6 risk reduction 16 synergies 254, 257 mobile operating theatres (case study) 200–201 mutually exhaustive, collectively exhaustive 272–4, 328 mystery shopping 320 new business models 199–201 numbers, presentation of 367–88 averages 370–73 charts 374–84 misleading 377–84 consistency 368 forecasting 384–7 index numbers 368–73 rounding 367–8 significant figures 368 spurious accuracy 368 tables 373–4 trends 387–9 oil rig gas sensors (case study) 188–9, 191–2 operational segmentation 53, 99–110 demographic 100–104 psychographic 104–5 purchasing approach 105–8 socio-economic 104–5 organizational capabilities 113–15 parking offences (case study) 369, 371–2 partner quadrant, customer segmentation matrix 172–5 measuring performance 175 strategies 174 partnerships 175–6 perfect competition 79–80 PIMS (Profit Impact of Market Strategy) 124 planning 40–41, 294–6 platforms for interviews 290, 316–17 port operations (case study) 130–31 Porter’s Five Forces model see Five Forces model portfolio analysis 237–40 pressure groups, data collection 286 price down quadrant, customer segmentation matrix 163–9 395 measuring performance 169 relative value perception 164 strategies 168–9 value mapping 164–6 price elasticity of demand 73–5 of supply 76–7 price sensitivity 91–2 private equity investment 6–8, 32 debt 6–8 product differentiation 50–52 industry rivalry 86–7 products 65–7 new see innovation substitute 82 understanding 32–3 profit 79–80 Profit Impact of Market Strategy (PIMS) 124 profitability, forecasting 96–7 project management 294 project teams 41 prospects, assessment of 236–40 proxies, segmentation of markets 59–64 psychographics business-to-business markets 105 consumer markets 104–5 psychometric tests 219 publishing (case study) 223 quality, competitive advantage 132–3 questionnaires 299–312 length 300 objectives 300 questions content 301–5 case study 303–4 dichotomous 311–12 multiple-choice 308–11 open-ended 308 order of 300–301 phrasing of 305–8 case study 305–6 responses 308–12 Raleigh 61–2 recovery of businesses 210–11 recruitment process outsourcing (case study) 103–4 regulators, data collection 286 relative value perception 164 reports 323–39, 365–90 active voice 334–5 charts 374–84 misleading 377–84 perceptual maps 376–7 relatives 375–6 clarity 331–2 conciseness 332–3 396 Commercial Due Diligence consistency 336 context 323 directness 329–31 interim 294–5, 336 issues 324–8 classification 327–8 grouping 325–8 logical flow 325–7 MECE (mutually exhaustive, collectively exhaustive) 328 one at a time 324–5 sign-posts 328 numbers, presentation of 367–88 averages 370–73 charts 374–84 consistency 368 forecasting 384–7 index numbers 368–73 rounding 367–8 significant figures 368 spurious accuracy 368 tables 373–4 trends 387–9 objectiveness 335 phrases to avoid 365–7 quotes 332 relevancy 329 sentence structure 333–5 specificity 335–6 spell checking 336 structure 323–4 style 329–36, 389–90 tables 373–4 vendor 336–7 words to avoid 365–7 resources appraisal 120 to capabilities 115 human 113 identification 117–18 checklist 355–6 intangible 112–13 profit potential 115–17 rheometers (case study) 168 risk commercial 7–9 financial 7–8 perceived 35 risk assessment 44 risk reduction 15 acquisitions 16 due diligence 16–18 S-C-Q approach 324 profiles 270 sales forces 176–7 benchmark processes 176–7 strategies 176 scenario analysis 96–7, 258 Schumpeterian markets 94 segmentation of customers 156–75 interviews 159 segmentation of markets 49–52 benefits-based 58–9 company strategy 63 customer needs 62–3 customer technology 60–61 differentiation of businesses 127–8 end market 61–2 geographic boundaries 64–5 operational 53, 99–110 demographic 100–104 psychographic 104–5 purchasing approach 105–8 socio-economic 104–5 proxies 59–64 size of order 59 strategic 52–65 strategic groups 63–4 technology 60 sellers, customer research 291–2 sensitive commercial information 291 services 65–7 shop around quadrant, customer segmentation matrix 159–63 performance measures 163 strategies 161–3 augmenting the transaction 161 cost reduction 162–3 differentiation 161–2 socio-economic segmentation 104–5 SPACE (Strategic Position and Action Evaluation) 236, 237 spreadsheet modelling 241–54 build 249–50 design 244–9 scope 241 specification 241–4 bubble diagrams 243 calculation tables 243 prototype models 244 test 250–52 use 253–4 version control 254 strategic analysis 47–8 strategic environments 93–4 strategic group analysis 63–4 Strategic Position and Action Evaluation (SPACE) 236, 237 strategic segmentation 52–65 strategy clock 126 Sturmey Archer 61–2 substitute products 82 suppliers, data collection 285 supply 76–8 Index and demand 78 economics 80–81 price elasticity 76–7 shifts in 77–8 SWOT analysis 118–23 E-V-R congruence 122 scored 121–2 teams 41 terms of reference 39–40 thermal imaging cameras (case study) 190 thermal insulation (case study) 22–4 threats and opportunities, checklist 357 timetables 41–2 restricted 293 transactions, categorization 161–2 tubing (case study) 112 397 unique selling propositions (USPs) 117, 123 valuation 254–61 value 155 value chain 114, 130–31 value mapping 164–6 customers 166–7 drawing the map 167 information gathering 167 non-price attributes 166 price 166 value propositions 156 valves (case study) 54–6 vendor CDD reports (VCDD) 336–7 venture capital 32 Wells Fargo 17 This page intentionally left blank . ..Commercial Due Diligence This page intentionally left blank Commercial Due Diligence The Key to Understanding Value in an Acquisition PETER HOWSON #... all departments have customer contact What is the different approach to use with different customers? Customer satisfaction and customer loyalty Customer loyalty and customer sophistication Service... book to make you good by giving you a solid foundation on which to build experience and with which to develop judgement and confidence This page intentionally left blank PART I The Basics This page