If you are participating on the buy side of a deal, there are many obstacles to clarity. Whether you are looking at it from a strategic or financial perspective, there are many landmines to avoid. An obvious one is gauging the future.
Financial analysts are very good at dissecting the cost side of the target’s picture. Assessing current cost structures and how those might be re-engineered to create value post-transaction is a science that professionals understand. Compared with cost dynamics it’s a more complex task to assess the revenue picture going forward. Deciphering the likelihood of forward revenue involves assessing a whole host of marketplace factors that are hard to predict. It also involves the future behavior of market participants who are not at the table: customers, channel partners, consultants and other influencers of buying behavior.
Despite the complexity and murkiness, this important marketplace input can’t be safely ignored. It’s quite possible that some of this hard-to-measure upside being touted by the seller is part of the deal’s attraction; i.e., buyers see this upside and have a gut sense that it will be realized, with the aid of stellar execution following the closing.
Exploring these marketplace factors is both an art and a science. Extrapolating the past into the future requires independent expertise. It’s common practice to hire specialty firms to conduct valuation work and due diligence on legal, regulatory, IT and other categories. Why not do the same for these critical sales and marketing questions?