Five Main Influencers Driving Demand For Pre-exclusivity Market Diligence

What’s needed for a good, clean break in pool? 

Precision? The right angle? Speed? Impact? 

Yes! 

Coincidentally, Pre-LOI diligence has all of these elements, too -- mainly Impact. And as a result, Pre-LOI market diligence is growing in popularity.

There are five main influencers driving increased demand for market diligence prior to submission of a Letter of Intent (LOI).  

“Impact” is the most relevant driver

Suppose you are considering submitting a bid on a company because you believe there is a fundamental shift in the market, or in the way customers choose suppliers, or in the way competitors are going to market. 

And suppose you believe if any of those hypotheses were true, your acquisition target company would perform extremely well. (And if you are wrong, and those assumptions are false, you lose money.) 

Imagine the impact of a Confirmed/Refuted answer to your basic investment premise – in one week, with a team of two consultants, for a very minimal fee. As a result, you would confidently bid even more aggressively or perhaps run in the other direction. The main reason that Pre-exclusivity market research is gaining popularity is the Impact (and ROI) of this research. 

The Five Main Influencers

1. Investment Banker Processes

Bankers are intentionally reducing the window of opportunity for conducting formal, post-LOI diligence. In response to speedier processes, private equity buyers are conducting more diligence activities before the deal is formally signed up. 

2. Positioning with the Sellers

In competitive auction processes, it can be worthwhile to distinguish one’s interest, purposefulness, and seriousness from other bidders. Investing time, energy and financial resources at this early stage not only distinguish your firm but can also foster the relationship-building process, as well.

3. Risk Mitigation

Front-loading key market diligence items could curtail or reduce the need for costly full-blown diligence activity that occurs post-LOI. Conducting the most critical aspect of external research up front in the process can eliminate the expenses associated with all the other aspects of diligence if the pre-LOI market diligence reveals significant problems. 

4. Justification of Higher Multiples

On the other hand, pre-LOI market diligence may uncover hidden opportunities that would justify a robust, winning bid. Often the winner in an auction process can offer a higher multiple than others because they are aware of the market or competitive opportunities not uncovered by others. The discovery of these opportunities changes assumptions about growth prospects for the Company.

5. Value and Return on Investment

Given the short timeline, limited scope and reduced staffing requirements of pre-LOI market diligence, these projects are inexpensive. Yet, they can be exceptionally revealing and hence valuable. Simply put, the ROI of these projects can be significant. 

Why not Conduct this Work In-House?

Outsourcing the market diligence work to a third-party is beneficial for several reasons:

Expertise - Outside experts are experienced in gaining actionable insights based on market research – this is what they do for a living.

Time – Outsourced consultants save you valuable time and effort – they are efficient and can do this work in a matter of days.

Cost - Pre-LOI market diligence is inexpensive.

Candor and objectivity - you may bias the contacts somewhat, or worse, you may alert the industry that an acquisition process is underway and create some speculating on who the target may be.

Who Conducts the Work at the Research/Consulting Firm?

The same team that will conduct the full post-LOI, market diligence is the proper team to conduct the pre-LOI work. At our firm, this typically means an Operating Executive (who thinks like the client and keeps the team focused on the issues of highest priority to make the work as actionable as possible); a Project Manager (who is the central clearinghouse for all data and communications -- internal and with the client -- throughout the project) and several consultants (who handle the research and aid in the analysis of the data).

How is the Research Conducted?

Without access to management, customer lists, or confidential company information, how can the research take place? Since a typical market diligence exercise only relies to a limited extent on internal company information, it is not as difficult as it may sound.

The primary tool that researchers use to conduct market due diligence is the telephone. Qualitative and quantitative primary research largely involves speaking with competitors, industry experts, customers/prospects, trade associations and other industry stakeholders. 

Conclusion

Conducting third-party pre-LOI market diligence is a cost-effective way to gain a more thorough understanding of opportunities and threats to the target -- before submitting a bid. Investing a limited amount of capital up front can ultimately pay significant dividends. And it is appreciated not only by the potential acquirers but by the bankers and sellers, as well.

This article is based on the white paper, THE FIVE DRIVERS OF PRE-LOI MARKET DUE DILIGENCE, published by Acclaro Growth Partners. To read the complete text, Download the full white paper.

About the Author

Christopher “Kit” Lisle is the Managing Partner of Acclaro Growth Partners. He can be reached at 703.434.3597 or [email protected]. 

Acclaro Growth Partners is a research-based strategy consulting firm that provides market/business due diligence, strategic market insights, and market growth planning, serving private equity and corporate clients.

We look forward to hearing about what’s keeping you up at night.