Every VC understands the importance of checking the legal and financial aspects of a prospective venture. But the ones at the top of their game look deeper into the organisation applying for investment, ensuring they understand the strengths and weaknesses of the sales, marketing, and operational teams. The company may have a great product, but have they got the systems and structures in place to deliver it and reach targets?
There are strong advantages in getting to grips with the operational facets of the organisation prior to investment. Knowledge is power, and by getting to grips with the present-day reality of the prospect’s business, rather than relying on a slick investment pitch, you can determine where you need to focus your money and efforts, and where there is a potential to drive increased revenue and ultimately, profit.
Advantages of robust Operational Due Diligence
Operational Due Diligence (ODD) specifically drills down into the day to day work processes and management of a firm, to unearth any risks which the potential investor would benefit from understanding upfront. ODD can be carried out for any business function. However one aspect that is too often skimmed over, even though paying attention to it can reap considerable benefit, is that of sales and marketing.
ODD is not just about risk assessment; it can help identify growth opportunities for revenue and profits. Private investment specialists Hugh MacArthur, Graham Elton, Daniel Haas and Suvir Varma, commented in Forbes.com, “the practical route to accurately assessing and realising the margin expansion opportunity starts with operational due diligence, combined with commercial due diligence. Together they provide a robust, realistic view of the target’s full potential. Whereas commercial due diligence provides a perspective on how fast the target company’s market will grow and whether the target could increase revenue faster or slower than the market, operational due diligence assesses the opportunity for the target to expand margins”.
Consultants running the ODD will look at the leadership and assess whether they have the skills, resources, and commitment required to scale a team and successfully ensure the sales and marketing departments are integrated. In addition, they will examine whether there is concrete evidence that there is a strong market for the product or service.
The lifeblood of your investment
On face value, the business you are keen to invest in may enjoy solid sales team performance. With lots of signed contracts ready for delivery, you may be given the impression you have a prolific sales department on your hands, but is this reality? In our experience, the best sales teams are highly integrated within their organisation in a manner that ensures what they sell can be delivered faithfully. Those at the customer coalface honestly reflect the capabilities of their products and services and what the organisation can actually deliver.
Selling ‘vapourware’ is a recipe for disaster, as those pile of contracts will quickly turn into a pile of cancellations and possibly lawsuits. For example, telling customers you can provide HR, finance, and business software products which you have implemented successfully many times is one thing, but telling them they integrate, when they don’t, maybe a one-way trip to a legal nightmare. ODD will look into whether the sales team’s rhetoric matches the realities of the company’s ability to fulfil orders. And not just that – it will check the status of client retention. A company’s pitch may show targets are being hit and the sales pipeline is being constantly filled but hide the fact cancellations are rife because of bad service and delivery failures.
Metrics are a way to quickly get to grips with the sales and marketing health of a business. ODD can show how long it takes to action a new lead, and then how much time is being spent on selling. In poorly functioning businesses, salespeople act as account managers and fire-fighters, dealing with support issues and complaints, with little time actually being spent on sales proper.
The customer never lies
Once sales are made, ODD can inform VC’s how many sales contracts lead to successful delivery. Customer satisfaction results will tell you much about the ability of the business to execute in accordance with the sold ‘dream’. This type of due diligence answers several important questions, including:
How well do the sales team understand the products they are selling?
How well do the sales and marketing team collaborate?
Are clients’ expectations being managed?
How well are the product, delivery, and support team aligned with sales?
Asking customers/clients directly about their experience of working with the business can quickly allow you to get past the bluster and blind optimism you are hearing from the directors. Customer complaints are normal and to be expected, but strong ODD will unearth excessive consumer unhappiness which may point to serious flaws in the company’s sales and marketing models.
Looking at the financial and legal health of a company allows investors to gain perspective on one element of the business – which while essential, may not be the best measure of its long-term viability. Examining the integration of the sales and marketing teams, lead generation and execution, asking whether the company can sell in a sustainable manner that drives revenue as well as create happy clients and a robust brand – this is vital to understanding the full picture of the business. ODD can be done quickly when conducted by specialists in this field, leading to a detailed report and executive summary on which you can make your final assessment.
Reach Revenue works with business owners, leaders and investors to develop high performing sales and marketing teams aligned to the strategic objectives of their business. To find out how we can help you, please call 0203 858 8030 or email firstname.lastname@example.org