Elevating Due Diligence Value Creation By Mastering The Beta Phase

In the complex world of business transactions, due diligence (DD) plays a critical role. The primary aim of due diligence is to identify risks, problems, and opportunities, thereby elevating the business value. Today DD of private equity lies on the value creation-focused approach. However, how can a private equity firm or a buyer in general ensure to deliver the value in the Post Acquisition Phase, based on what has been analysed and promised in the business plans during the DD ?

Post Acquisition phases with additional mergers, ambitious growth plans, new management integrations, HR hiring marathons and reorganizations are complex, therefore we focus on supporting the implementation of the critical business development projects. To support the tough challenges of the management and be more efficient with the implementation of the projects we developed the DD Beta Phase (in short: DDβ). The DDβ compares to the Beta Phase of software development. During this phase we go one step further than during the last DD phase – primarily to identify and quantify new sales opportunities, generate real leads, future partners, design automation concepts, nearshoring strategies, operational excellence and finally quick wins that can be leveraged faster during the ownership period. Typically, DDβ runs parallel to the legal and financial deep dives and aids in validating the assumptions within the business case.

But, how real value can be created after the last DD step? This article explores this question by diving deeper into the DDβ Phase of value creation post last DD step.

1. The Conventional Approach to Due Diligence

Traditionally, DD has been about identifying potential risks and problems that may impact the business’s value. By identifying and addressing issues ahead of time, sellers can streamline the negotiation process, reduce transaction time and costs, and increase the likelihood of closing the deal on their terms especially by creating very ambitious business plans (“hockey sticks”).

twentysecond is highly specialised in supporting private equity firms and other buyers during the DD phase. The following typical categories of due diligence are usually conducted in an acquisition:

  1. Operational DD delves into the inner workings of a target entity. It scrutinizes the efficiency of business processes, the robustness of internal controls, and the adeptness of management teams. In addition, the status of digitization in workflow processes and customer journeys will be assessed. An exemple of operational diligence can be seen in the acquisition of a mid-sized asset management firm by a larger financial conglomerate. The acquirer meticulously assessed the firm’s operational workflow, compliance measures, and the scalability of its systems to ensure a seamless integration post-acquisition.
  2. Commercial DD, on the other hand, concentrates on the market dynamics and the competitive landscape. It evaluates the target’s market position, growth prospects, and customer relationships. For instance, before a bank extends a significant loan to a retail company, it may conduct a thorough analysis of the retailer’s market share, customer base stability, and the competitive pressures it faces from e-commerce platforms.
  3. Technical Process DD is particularly crucial in today’s digital era. It involves a deep dive into the technology to automize processes, e.g. customer lifecycle management (CLM) and customer relationship management (CRM), back-office processes or G&M functions. It is crucial in these analyses to assess the effectiveness and potential of generative AI.

The conventional approach to DD is a balanced amalgamation of these three pillars. It ensures a holistic view of the target’s capabilities and potential pitfalls, enabling the buyer to make judicious decisions backed by empirical and qualitative data. While this approach is systematic and comprehensive, it is also fluid, adapting to the unique requirements and risk appetites of the assessing entity.

2. The Challenges of DD and Post-Acquisition Value Creation

The DD phase in any acquisition process is often characterized by a whirlwind of activity, operating under tight time constraints. This phase is crucial as it provides the necessary insights and data for calculating the business case and, subsequently, the acquisition price. However, despite its significance, several challenges arise during this phase, leading to potential value erosion in the post-acquisition period.

One of the primary issues lies in the multitude of assumptions made during DD many of which remain unvalidated. Importantly, potential new clients, new business partners, the management and key employees of the target company are often not consulted or involved in the formulation of these assumptions before the acquisition. This lack of input can lead to discrepancies between expectations and reality, setting the stage for post-acquisition challenges.

Furthermore, a significant portion of the insights gained and work conducted during DD often fails to transition into the post-acquisition phase. This oversight results in the loss of valuable information and potential value that the due diligence process could have contributed.

Several factors contribute to this loss of value:

  • Firstly, there is often a disconnect between the individuals conducting DD and those tasked with driving value creation post-acquisition. The skill sets and priorities required for each phase can differ significantly, leading to a gap in understanding and execution.

  • Secondly, assumptions made during DD, particularly regarding potential growth opportunities, are not adequately validated. This oversight can lead to inflated expectations and unrealistic projections, ultimately impacting the success of the acquisition.

  • Moreover, DD efforts often fail to engage with potential customers or business partners, resulting in a missed opportunity to establish essential relationships and build a robust pipeline for future growth.

  • Lastly, inadequate preparation during DD means that there is often a delay in initiating value-enhancing initiatives immediately after the acquisition. This delay not only results in missed opportunities but also allows valuable time to slip away without tangible progress towards value creation.

In light of these challenges, it is imperative for organizations to reassess their approach to DD and post-acquisition integration. This may involve greater collaboration between DD teams and post-acquisition management, as well as a more robust validation process for key assumptions. Additionally, efforts should be made to actively engage with stakeholders and lay the groundwork for value creation from the outset of the acquisition process. By addressing these issues, organizations can better position themselves to realize the full potential of their acquisitions and drive sustainable growth in the long term.

While cleaning up issues before going to market makes the transaction smoother, it doesn’t necessarily increase the business’s value. One of the key strategies to amplify business value post-DD is to incorporate value creation into the DD process. This involves blending technology, data, and operations to create a holistic and quantifiably backed view of the target business.

But the question at this point is, how can we create more value from a DD?

3. Elevating Value Creation during the DD Beta Phase

Despite recognizing the importance of value creation, many businesses struggle to incorporate the outputs from DD into their value creation plans. This is often due to the difficulty in connecting top-down diligence estimates to bottom-up execution plans. But the question remains, how do we ensure the performance of the strategy implementation?

The Beta Phase integrated DD framework designed and developed by twentysecond is not only pivotal for informed investment decisions but also for crafting a nuanced understanding of the strategic, operational, and commercial interdependencies of a company and gives more certainty to assumptions underlying the business case. The DD Beta phase is a part of regular due diligence or typically conducted between deal announcement and closing. Additionally, the DDB phase serves as the foundation for value creation in the post-acquisition phase. Main parts of our DDβ framework:

  1. Identifying Strategic Opportunities
    • Strategic DD is at the heart of M&A, focusing on the commercial viability and the strategic rationale of a deal. We delve deeper into the commercial attractiveness by validating financial projections and synergies and assessing addional strategic M&A add ons
    • A rigorous internal examination of the management team’s capabilities ensures we understand and plan for risks such as customer attrition, competitive responses, technology issues, and cultural challenges, ultimately evaluating our ability to realize the targeted value of the deal
  2. Bridging the Disconnect in Value Creation
    • In our continuous effort to win new customers during the DD process, we have embraced a holistic approach that interweaves strategic insights with the identification of opportunities
    • To be successful after the Acquisition or Merger, a clear action plan needs to be drawn
    • Potentials, identified during the commercial and operational DD, are reflected in a business case but mostly not confirmed at this stage of the DD
    • The DDβ Phase challenges the business cases and market forecast hypothesis with market stakeholders but also identifying and quantifying new sales opportunities, real leads, future partners, automation concepts, nearshoring, operational excellence and finally quick wins that can be leveraged faster during the ownership period.

Here after, a concrete example we implemented during our last DD Beta Phase: while reviewing the sales pipeline of the target, we started to pre-pitch our client’s target value proposition to future partners key accounts & future customers, i.e. online marketplaces, e-commerce, large retailers.

For entering new markets, we strongly recommend proceeding to pilot phases and ensure the future team has all the skills, organization, and tools to win the market. By adopting a more holistic view and combining data from various sources, businesses can bridge this disconnect and create tangible, quantitatively backed value creation plans.

  1. Technological Edge in DD
    • Our DD arsenal includes AI-powered tools, which leverages machine learning and data analytics to analyze data, flag potential red flags, and uncover hidden insights.
    • This technological prowess not only enhances accuracy in identifying potential risks and opportunities but also accelerates the DD process, allowing us to focus on strategic pursuits and operational efficiency.
    • When we calculate savings for our private equity customers we assume the professional, heavy use of AI and AI based tools in Operations, Sales and G&M functions – but always with a strong focus on best-in-class customer journeys & experience.

Empowering Real Change: Beyond AI Aesthetics to Impactful Innovation

Chatbot studies made by Forrester Consulting result in the same statements: consumers view chatbots favorably, as they provide 24/7 support, faster response times, and autonomy. As a result, chatbots typically rank higher than speaking directly with an agent or any other digital channel of communication.

However almost 75% of consumers agree that chatbots aren’t able to handle complex questions and are often unable to provide accurate answers. More than half of the consumers surveyed agree it is difficult to find a solution to their question or problem using a chatbot. Almost half of respondents said that chatbots have provided them with responses and/or solutions that didn’t make sense in the context of their question. When a customer looks for an answer, he doesn’t want to have an empty conversations with chatbots or wants to be the trainer of the chatbot.

Most frustrating (based customer experience) is the chatbot-human connection or lack thereof: More than half of the respondents reported that they are often unable to connect with an agent even after exhausting the chatbot’s responses.

The result of negative chatbot interactions? 30% of consumers said that after a negative chatbot experience, they are likely to take their purchase to a different brand, abandon their purchase altogether, or tell their friends and family about their poor experience with the brand.

What we would do to improve Customer Support efficiency with support of AI?

A leading contact center has recently adopted an innovative AI technology to enhance its operational capabilities. This advanced tool is designed to optimize resource allocation, streamline internal processes, and provide valuable insights that contribute to ongoing business enhancement efforts.

Integration of AI in Customer Support Services

  • Resource Allocation: The AI system efficiently locates and assigns the appropriate resources to meet varying customer needs, ensuring a more dynamic and responsive service environment
  • Process Streamlining: By automating routine tasks, the technology significantly reduces manual workload, allowing staff to focus on more complex customer interactions that require a human touch
  • Business Insights: Through the analysis of large volumes of data, the AI provides strategic insights that aid in identifying areas for improvement, helping the business adapt and grow in an ever-changing market
  • Customer Support Enhancement: The integration of this AI tool into customer support teams has led to an improved customer experience, with faster response times, allowing agents to faster get to the right information and provide more personalized assistance

The implementation of this cutting-edge technology has marked a significant step forward for the contact center, positioning it as a forward-thinking player in the industry, dedicated to continuous improvement and customer satisfaction.

In summary

By integrating these strategies, we not only conduct a standard DD but also lay the groundwork for operational efficiency and value creation post-due diligence with our DDβ. Our clients benefit from our forward-looking and strategic approach to Commercial DD, ensuring they are well-positioned to thrive in the private markets, even in volatile times. As we continue to refine our processes, we remain vigilant of inventory management issues and related party transactions, particularly prevalent in mid and lower-mid market companies, ensuring a seamless integration and value realization.

As consultants, we are not part of the culture alignment of merged and acquired companies – we purely focus on delivering value by boosting the projects.

As entrepreneurs we create business value – we build an actionable strategy that the new management will implement with our help, but we are regularly following up with mystery shopping, customer satisfaction surveys and our quality and performance insurance program.

Throughout this article, we have delved into the critical role of due diligence in value creation and customer acquisition within the private equity spectrum. By employing a robust DD methodology and leveraging advanced technological tools, we set the baseline to DDβ Phase that will confirm the identified strategic opportunities and ensure our clients maintain a competitive edge in the market they want to grow in. The insights gained throughout this process not only inform investment decisions but also lay the groundwork for operational efficiency and high post-deal value creation.

As we look to the future, our commitment to refining DD strategies remains steadfast, with the aim of enabling our clients to thrive even amid market volatility. DDβ Phase and the strategic implementation of the confirmed improvement plans are the keystones to our approach, fostering sustainable growth and positioning ourselves as indispensable partners in our clients’ journeys toward success and market leadership.