FRIDAY 19 JAN 2024 10:00 AM

BUYER BEWARE! WHY RESEARCHING REPUTATION MUST BE A VITAL PART OF THE DUE DILIGENCE PROCESS

Steve Leigh, managing director at research and measurement consultancy Sensu Insight, explains why understanding a company's reputation should be a priority for investors.

From acquisitions to investments, when it comes to making a significant business move, being equipped with the facts about a prospective company is critical. Conducting thorough due diligence to safeguard investments is essential in an economic landscape where protecting every pound is vital.

While investors typically review the financial fine print and the devil in the legal details, reputation is too often overlooked as part of the process. Understanding existing and emerging stakeholder perceptions of a company and how they are driving – or could threaten – reputation, future sales or increase potential costs or liabilities can be critical in mitigating risk and allowing decisions to be made with greater knowledge and insight. Image is everything and news can spread in an instant – decision-makers must be hyper-aware of issues or emerging risks that could attract negative attention or unwanted visibility before taking action. 

Smoke and mirrors or serious opportunity?

From the outside, a company might seem like the perfect investment opportunity. But while businesses often spend a lot on marketing themselves, some elements of their image are beyond their control.

Potential problems can always bubble beneath the surface and threaten to rear their head. Issues around the treatment of employees, allegations of misconduct, and accusations of the inappropriate behaviour of senior leaders, have all made headlines in recent years, tarnishing the reputations of major organisations. Understanding the mood music of former and current employees, customers, the media, and other key stakeholders can give investors the full picture and illustrate issues that may not be apparent from a spreadsheet.

Identifying preconceptions and problems – or alternative opportunities

Undertaking reputation due diligence is critical before closing a deal; being blind to the warning signs is simply not worth the risk.

This involves reviewing how a company is perceived in the market by both internal and external stakeholders. A detailed framework enables businesses to examine the factors and issues influencing brand reputation and driving positive – or negative – sentiment. These could range from corporate citizenship and innovation to stakeholder engagement and business performance.

Conducting a thorough analysis of such reputation dimensions helps to identify strengths and weaknesses, pinpointing risks as well as untapped potential.

It might be that the company has been cutting back on costs to make itself more attractive to investors, but has done so at the expense of customer satisfaction. Or maybe the business recently increased prices and customers have taken to social media to vent about the poor quality of their purchase, influencing others to boycott the brand. Equally, there may be fringe issues where negative sentiment is growing rapidly, but not enough to currently register on the bottom line.

On the flip side, this process can also shine a light on stakeholder priorities, highlighting areas for growth to be driven with further investment or a new strategy. Also, the company might be a hit with stakeholders that know about it, but largely invisible with its wider, potential market, meaning its current performance is way lower than its potential.

A sector-wide reputation review might also highlight major flaws in the products and services of competitors, highlighting a strategy to accelerate growth beyond current projections.

Making a move through measured decision-making

Once these insights are laid bare, collating and analysing this intel in a comprehensive due diligence report can equip investors to make educated decisions. This may well mean deciding not to progress with the corporate opportunity, however, finding issues doesn’t necessarily mean the deal shouldn’t go ahead. Having as much information as possible is a smart way to inform future strategy and direction.

Having the right insights can help identify ways to resolve existing challenges before they become bigger, working to limit negative exposure. It can also mean maintaining trust through transparency – an important factor in an age of increasing scrutiny and calls for authenticity.

By doing the research before taking the leap, investors can avoid potential corporate downfall, capitalise on opportunity, and make the most of the return on their investment.