I’ve been reading and listening about how the Elon Musk-Twitter deal is on the rocks and it’s over the number of fake Twitter users. No different than in (much) smaller deals where users are called customers. In retail the old adage is location, location, location. In any business it’s:
- People – as in the employees
- People – the customers
- People – the suppliers
Customers are always one of the top diligence items in buy-sell deals, in valuation, and in ongoing operations. In all my years in this business I’ve only had a handful of post-close disputes or claims. As I recall, every one of them was about customer issues, as in the seller not disclosing a leaving (material) customer.
I’ve got to believe there was upfront knowledge about the fake Twitter users, unlike in small business where all is confidential. It’s why it takes some digging to confirm all is okay with customers. And not just asking simple questions so they’ll say, “we love doing business with them” but getting into other areas like loyalty, pricing, and strength (of the customers business).
Pricing is a big one. I can give facts, but a story is better. A prospective client, who’s working on getting the business to the size and structure needed to sell, has one large customer. He knows the customer will eventually leave but he’s getting what he can for now. Why the nonchalant attitude? Because the customer is so low margin he knows it wouldn’t take much to replace the gross profit amount (at lower a sales volume).
When it comes to diligence on customers, what I’ve learned from experience is a seller must let the buyer talk (confidentially) to the customers. If they won’t allow it, one has to wonder what they’re hiding because I’ve never had deal confidentiality broken because of customer diligence.
“There are only two ways to have a peaceful conscience: Never do anything wrong or learn self-forgiveness. Pro tip: First way’s impossible.” Elizabeth Gilbert