The Ultimate Guide to Marketing Due Diligence

In the last 6 years, we’ve done hundreds of engagements with leading Private Equity firms. Of these engagements, a large chunk are Marketing Due Diligence engagements between LOI and Close. This is where we help the Private Equity firms vet their target investments and build effective and detailed value creation plans to scale pipeline and revenue so they can hit the ground running in the first 100 days. In this article, we’ll capture some of the most important areas you need to analyze when vetting a potential investment in a particular business.

Why Marketing Due Diligence is Emerging—and Becoming More Important Than Ever

First, let’s start with the “Why” behind Marketing Due Diligence. 

Between 2000 and 2019, Marketing was not considered an essential part of building the kinds of companies investors were putting money into. It was very common to find $10 to $100 million dollar businesses that had grown over time with Sales being the main revenue driver. In these companies, Marketing was limited to traditional activities such as Events, PR, Communications and Branding activities—and Marketing was not accountable for Revenue.

As a result, when investors tried to diligence these companies for revenue predictability, forecasting and underwriting purposes, they spent most of their time on:

• Sales pipeline, process, performance, people

• Market analysis, TAM, segmentation, share of wallet

• Financial analysis and projections

• Other essential areas of diligence (technical, legal, product etc.)

Billions of dollars were deployed without ever doing a deep dive into the budget allocation of Marketing activities or the ROI of those activities. 

But in the mid-2010s, the market shifted. Consumers started buying without ever talking to Sales. Marketing started to play a bigger role in the customer journey and selling process and Marketing spend became a vital component of a company’s Go-To-Market strategy.

Note: This is right around when we started How To SaaS as a business. In 2019, we were the first to coin the term Marketing Due Diligence. It is also Chapter 1 of Shiv’s bestselling book, Post-Acquisition Marketing: How to Create Enterprise Value in the First 100 Days.

With these changing dynamics, it started to become obvious that hitting your revenue targets are just as dependent on Marketing as they are on Sales. One of the most important things to understand is that the Revenue problem inside companies is often a Marketing problem. If projections are being missed, everyone turns to Sales, fires the CRO, and replaces reps. But not enough time is spent looking at the Marketing spend, how many leads are being generated, whether the right leads are coming in, conversion rates through the funnel and much more. All of this contributes to the success of a GTM motion.

The companies that intuitively understand this grew significantly faster in the last decade than companies that didn’t. The investors that intuitively understand this built significantly better value creation plans with higher odds of success.

The best Private Equity investors we work with made it a core part of their standard operating procedure for acquiring companies. Just like they’d have workstreams for Financials, Legal, Insurance, Benefits, and Technical, they added Marketing as an essential workstream for all acquisitions. 

The Objectives and Essential Components of Marketing Due Diligence

There are three main questions investors need to answer during a Marketing Due Diligence process:

1. How predictable is future revenue and how big of a role does Marketing need to play in order to hit revenue projections?

2. Is the current Marketing team capable of helping the business get to where it needs to go? What kind of people transformation does the organization need to go through?

3. What kind of budget is needed to help the company scale to its growth aspirations and full potential, and where should that budget be deployed?

The earlier you figure out these three things, the stronger your value creation plan will be and the higher your likelihood of hitting your investment thesis and objectives.

Analyzing the Predictability of Future Revenue

This is often the disconnect in the financial projections and plans that investors make. Leads and MQLs are not free. They require Marketing Spend to be scaled. You also cannot brute force your way to more leads by hiring more reps or dialing more. You need a predictable process for every stage of the buyer journey and Marketing is a critical part of that. 

Analyzing current Marketing Program Spend is the first step to understanding revenue predictability better. During a Marketing Due Diligence process, it is critical to answer the following questions:

1. How is the current Marketing budget being deployed across Channels and Campaigns, and which activities are most effective in generating pipeline and revenue?

2. How much inefficiency exists in the current Marketing spend of the business and how much room is there to optimize?

3. How much opportunity in terms of additional pipeline and revenue is it possible to capture from scaling existing Marketing activities?

4. How much opportunity can be found by investing in net new Marketing activities that the company has previously ignored?

The big mistake investors make is that they often just take a look at Pipeline and Revenue on a month-over-month or year-over-year basis. They then use this data to try to extrapolate what is a reasonable amount of growth to expect from the business. This approach misses an essential part of commercial due diligence — that is, understanding all the components that influence Pipeline and Revenue from a bottom-up basis.

For example, we once had a Private Equity investor come to us with a target investment that had 80% of its leads coming from Facebook and Instagram Ads. The question they asked us to analyze is: Can that volume continue? They were used to assuming predictability from Google Ads, but not Meta. This is the right kind of question to ask during a diligence process. There are many circumstances where this kind of volume would be difficult to maintain. In this particular instance, we were able to validate that the volume was indeed maintainable and there was even potential to scale.

In each investment, Pipeline and Revenue sources can be broken down into such individual components. The viability of each component needs to be analyzed on an individual basis. Similar to how sales reps, quotas and territory planning need to be analyzed, each Marketing component needs to be analyzed and planned for to hit revenue targets. 

Common examples of components to analyze include:

• Google Ads Spend, Pipeline, Revenue, ROI and Trends

• LinkedIn Ads Spend, Pipeline, Revenue, ROI and Trends

• Meta Ads Spend, Pipeline, Revenue, ROI and Trends

• Website Traffic and Trends, Including Analysis by Source

• SEO and Organic Search Rankings and Traffic

• Events and Trade Show Spend, Pipeline, Revenue and ROI

The larger each component’s impact on overall Pipeline and Revenue, the more important it is to analyze during the diligence process. 

Analyzing each component involves answering the four questions above at a very detailed level:

1. Evaluating the current spend levels, historic performance and performance — this step involves identifying which channels are contributing the most to overall Pipeline and Revenue to figure out where the most opportunities likely exist.

2. Uncovering inefficiencies within current areas of spend — this step alone uncovers all kinds of waste. In most cases, we have found anywhere from 20-70% inefficiencies in prominent areas of spend for most companies. These become immediate value creation opportunities.

3. Mapping out how much opportunity there is to scale existing activities — this step involves identifying and reallocating existing budget to profitable activities and scaling spend until those activities are maximized.

4. Identifying net new areas that can drive more pipeline and revenue — this step involves building a roadmap of channels, programs and activities that the company has not previously invested in that need budget and experimentation to unlock additional value creation opportunities.

Going through these steps opens up a massive roadmap of opportunities for every business and gives a clear plan of action to scale as soon as the transaction closes.

Analyzing the Marketing Team

As the roadmap for Marketing Programs becomes clear, the next critical step is to ensure the right people are in place to actually implement the items that will create enterprise value. This is where the rapid timeline between LOI to Close can restrict what is possible to analyze. 

The key is to simplify the process and look at the Marketing Team to answer the following questions as succinctly as possible:

1. What are all the key roles required to execute on the roadmap for Marketing Programs that have been identified? 

2. Are all these roles currently filled? Which seats are currently empty?

3. Which people are in the wrong seats? Are any agencies underperforming or in need of being replaced?

4. Are there any integration opportunities for roles to be merged or eliminated?

5. Is the right CMO in place to lead the organization through this transformational period?

6. Which roles need to be hired for? Which roles are critical to hire for immediately? Which roles can be hired later?

Answering these questions should lead to an updated understanding of the right organization structure for the company once it has been acquired. 

It’s important to note that these answers should be taken with a grain of salt in the diligence phases. Investors do not have full access to the team at this point and it is difficult to fully understand the impact of sweeping organizational changes. The goal should be to get to a good enough answer at this stage that gives a directional understanding of resourcing and budgeting to support value creation activities.

Analyzing the Marketing Budget

Once there is a directional understanding of the changes to Program Spend and the Team, it is now possible to understand how much Marketing Budget will be required to achieve the value creation plan set forth in the investment thesis.

To keep it simple, it is important to look at the budget as follows:

Again, during an LOI to Close process, there is only so much access that is available. It is important to build these models with flex and room for adjustments as more information is revealed and more data becomes available in the data room—or even post-close when there is full access to the team, systems and data.

What Cannot be Done During a Rapid Marketing Due Diligence Process

It’s important to note that there are a lot of Marketing value creation levers that are difficult to prioritize during an LOI to Close process. There is simply not enough time, data or access to go through all of these items in a diligence process.

That being said, here are things you should avoid performing diligence on during an LOI to Close process:

• Content Strategy — Often requires full access to a content inventory, website tools, CRMs and much more.

• SEO Strategy — Outside-in analysis is possible during diligence but a thorough analysis requires access to systems, website data, conversion data and much more.

• ABM Strategy — Involves the development of a 1-to-1 playbook for top accounts and can only be built with far more data on the sales outreach process, revenue data sitting inside accounts, contact analysis, content planning and much more.

• Customer Marketing Strategy — Even though data rooms include cross-sell and upsell opportunities, mapping the Marketing plans to scale the growth of existing customer accounts requires full access to customer data, whitespace analysis, prioritization, content planning and much more.

This is a big reason why when we go through a Marketing Due Diligence process with a Private Equity firm, we often continue with the engagement post-close as more data, systems, and people access opens up.

How to Shortcut Marketing Due Diligence with Inquisio

One of the reasons we built Inquisio is because it can short-circuit a lot of the above analysis for investors in a matter of seconds. 

By inputting basic data about a target investment, you can get the above-outlined diligence analysis in seconds. The inputs required are data points included in any CIM or basic data room:

• Revenue

• YoY Growth Rate

• EBITDA 

• TAM

• ACV

• Budget

• Team

With these basic inputs, Inquisio churns out an instant, data-driven, AI-powered Marketing Due Diligence report on a target investment that gives you:

1. Recommendations on the Overall Marketing Budget

2. Splits on Program Spend vs. Headcount

3. Ideal Organizational Design and Structure across roles

4. Pipeline and Revenue expectations, along with Conversion Rates

5. Program Spend and ROI

6. Channels and Campaigns analysis

7. Paid Media Spend and ROI

8. Competitor Benchmarking 

9. Overall Strategic Recommendations

To learn more about how Inquisio gets instant, data-driven marketing due diligence reports for your prospective acquisitions, schedule a custom demo here.