Inside Customer Diligence: The 4 Questions That Matter Most in PE Deals

Private equity investors often ask us: "What exactly do these customer diligence studies cover?"

While every study is unique and tailored to the deal at hand, most revolve around a few common themes that consistently reveal whether the customer base is strong, fragile, or somewhere in between.

Here’s a closer look at the areas that should be focused on in your customer diligence and why they matter:

1. Customer Loyalty and Competitive Positioning

• What’s uncovered: How loyal are customers to this company? Do they truly prefer it, or are they splitting spend across competitors?
• Why it matters: The difference between a sticky customer base and a transactional one is enormous. Strong loyalty suggests stable future revenues, while a customer base that easily trades back and forth raises concerns about retention, pricing power, and competitive vulnerability.

2. Growth Outlook with Current Customers

• What’s the potential for customers to do more business with the company?

We test both awareness and appetite: Are customers aware of the company’s full offering? Are they open to buying additional products or services? Do they see a future in growing their relationship with the company?

• Why it matters: This insight helps investors assess whether growth will come from expansion within the base, often more cost-effective than chasing new customers.

3. Pricing Power (or Margin Risk)

• What’s uncovered: Good customer diligence doesn’t simply ask, “How do you rate XX on price?” Instead, it probes from multiple angles to understand:
  
  • Do customers see pricing as fair or aggressive?
  • How much flexibility does the company have to raise prices?
  • Is there pressure to lower prices in the future?
• Why it matters: These signals point to whether the company can sustain or expand margins—or if pricing dynamics will erode profitability.

4. Validation of New Products and Growth Bets

• What’s uncovered: Many management teams tout new products as a key driver of future growth. But are customers actually interested?‍

• Case study: In a recent study we conducted, the target’s management highlighted three new product lines as the foundation for growth. Yet when we spoke to over 35 customers, fewer than 15% expressed strong interest in any of them. That finding fundamentally challenged a core pillar of the deal thesis.

• Why it matters:Customer diligence ensures investors aren’t betting on a growth story that customers themselves don’t believe in.

Every Deal Is Unique, But Every Deal Deserves Customer Diligence 

While these four themes appear consistently, no two studies are the same. That's why we encourage firms to incorporate more customer diligence into their deals. 

The result? Actionable, customer-grounded insights that help you validate—or challenge—the story you’re buying into.

Ready to try customer diligence in your next deal? Schedule a free consult call with us to see how it all works.