Mitigating risk is what customer due diligence is all about. In-depth customer due diligence is typically the best way for investors to understand customer risk. To accomplish this, Mayfield conducts customer surveys under the seller’s corporate name. We let customers know that the seller is attempting to better understand how to serve them going forward. Open-ended questions reveal in-depth customer analysis of the quality of the product, service or software, their price sensitivity and whether the customer(s) intend to leave – all hugely important.
QUALITY OF THE OFFERING: One risk with software companies is the quality of the underlying software. Most knowledgeable investors will have a third party perform Technology Due Diligence to address that issue and overcome any concerns. Customer feedback also plays a large role in assessing the technology risk. For example:
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- Many customers of a software company commented on the lack of a few features that were crucial to their business operations. However, these respondents indicated that switching would be challenging and time-consuming and gave high NPS values. We brought these to our client’s attention, calling them "at risk.” At the same time the Technology Due Diligence found an outdated software platform. With the software being such a serious risk, the investors went back to the sellers. No deal structure could be agreed upon with the investors facing future, high investments in technology.
PRICING: With over 40+ years of gaining customer feedback, we know how to find out whether there is an opportunity to raise prices without driving the customers to go elsewhere. Some deals are made with the potential strategy of raising prices – particularly in sleepy industries where there are many long-standing, loyal customers. For example:
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- Our interviews are discussions; all questions are open-ended - we get the real scoop. If there is no mention of pricing being a weakness of the seller’s company or if pricing is a strength and switching to another supplier is difficult or time consuming – there is room to raise prices, which can be a highly valuable conclusion.
LARGE CUSTOMERS – LEAVING OR STAYING? What happens if the largest customer leaves? Which of course is a huge risk. Since we ask open-ended questions, customers tend to tell us the darndest things. Real-life examples include:
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- The target company’s largest customer represented almost 25% of the seller company’s revenue. This largest customer was happy to give high satisfaction scores and when asked about their future relationship, they said – “oh by the way, we are moving on to a supplier that has a broader array of offerings. We have been very satisfied with our present supplier, but it is time to move on. “
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- In a different case, the largest client scheduled a meeting with our Mayfield representative but canceled the day before. We tried to reschedule with no success. Around the same time, this largest customer informed the seller they would not be extending their contract. Obviously, the deal structure was re-evaluated.
- In a different case, the largest client scheduled a meeting with our Mayfield representative but canceled the day before. We tried to reschedule with no success. Around the same time, this largest customer informed the seller they would not be extending their contract. Obviously, the deal structure was re-evaluated.
One of the goals of customer due diligence is risk mitigation. Open-ended inquiries highlight why customers purchase the way they do and offer a thorough understanding of the decision process, and product view. Results from Mayfield’s in-depth customer feedback, allow investors to gain the valuable feedback needed to make informed business decisions.
