An in-depth look at transactional data is irreplaceable
Conducting financial due diligence is standard practice in today’s deal market. A typical due diligence scope entails an in-depth review of financial statement results and its related components. While this approach is useful in providing a clear picture of summary level historical performance, it will often fall short of giving sellers and buyers the whole picture.
Failing to uncover significant operating and financial performance drivers can put a deal and the investors at risk, and it’s not necessary today. With all the data that is being collected, buyers and sellers alike are able to drill down deeper on key business drivers. Some are opting to expand their diligence scope by performing an in-depth assessment of customer and product revenue and corresponding profitability, in tandem with their standard due diligence.
Transactional-level data is typically captured by businesses of all types. In fact, according to Forbes, data is growing faster than ever before and by the year 2020, about 1.67 megabytes of new information will be created every second for every human being on the planet. The question is, how can you make this data work for you? This data can be transformed into information that allows users to gain a deeper understanding of both the internal and external factors driving company performance. Whether you are a buyer looking to expose significant risks in a potential acquisition or a seller trying to correctly position a company for sale, a profitability assessment can provide insights into trends that unlock real value.
Prior to the practice of looking at transactional data, potential buyers would review profit and loss statements and trial balances without the detailed understanding of what areas the company was performing in and where there were weaknesses. This deep drill down into the data allows buyers and seller to answer questions they never have been able to before, like what customers are we at-risk of losing? What is the real customer retention rate? Why are certain geographic markets underperforming? What products and services are creating the most and least margin? Are products priced correctly? Which end markets are we failing to penetrate? And does our product portfolio contain the right mix? Being able to answer these types of questions allows buyers to make informed decisions about where the business is headed and why.
Additionally, while no one likes to see a deal re-traded, it’s important that buyers negotiate deal terms with as much undisputable information as possible. Very often completing this deep drill down will uncover negative trends in businesses that give the buyers leverage to negotiate a fairer price, and then buy the business and unlock value they wouldn’t have realized was sitting beneath the surface. Negotiating from either side of the table in today’s deal market without this information can be dangerous.
The bottom line is buyers and sellers don’t truly understand what is driving the results unless there is an analysis at the transactional level. Obtaining a detailed understanding of a company’s revenue and profitability is the only way to understand a company’s current performance and how the company can be managed to optimize future results.