The Deal That Died in the Reference Calls
Financial statements show what a company earned. Legal review shows what it owns and owes. Neither shows whether the customers, suppliers, and employees around the business plan to stay. Sometimes the most consequential evidence in a deal comes from a 30-minute call with someone who has no reason to help sell the company.
That is where many deals quietly come apart. Buyers rarely walk away over one call. A cautious answer sends the team back to the renewal terms, the terms raise a question about revenue quality, and the question reaches the price. The warning was usually available. Nobody asked the right people, or asked the wrong ones, or asked too late to act.
Why Reference Calls Get Treated as a Formality
Diligence gets built around what can be documented. Accountants test the numbers and lawyers read the contracts, and paper feels like proof. Reference calls with customers, suppliers, and former employees produce hesitation, tone, and opinion, so they land at the back of the schedule.
I have seen a recurring pattern in mid-market deals. Teams hand these calls to the most junior people, run them from a generic checklist, or push them into the final days before closing to avoid unsettling the target's market. By then everyone wants the deal to close, and that wish shapes how each answer gets heard.
ACG Strategic Insights™ has covered broader diligence blind spots, such as leaning on historical financial reporting while missing forward-looking operational bottlenecks, and how acquirers should structure diligence before a letter of intent. Calls to the people around a business are a different failure point. They test whether the strength management describes exists outside the presentation.
The research points the same way. David Harding and Ted Rouse of Bain & Company argued in Human Due Diligence, published in Harvard Business Review in 2007, that most acquirers handle financial diligence thoroughly while ignoring or underestimating people issues.
What a Hand-Picked List Cannot Tell You
Sellers usually supply the customer list, so you hear from accounts they chose. The ICAEW Corporate Finance Faculty guideline Commercial Due Diligence, co-authored by KPMG Strategy Group and Luminii Consulting, says best practice is for the practitioner to select the customers and to disclose any limit on that choice to the client and to readers of the report. The guideline reflects UK and European practice, so local rules and deal customs will vary.
The better question is why customers stay. Some renew because the product beats the alternatives. Others renew because switching is a project nobody has scheduled. The retention rate looks the same either way, but only the first survives a new owner, a price increase, or a competitor who makes leaving cheaper. Contractual retention and behavioral loyalty are different assets, and only the customer can tell you which one you're buying.
Rob Ospalik, then a partner and co-head of global operations at Baird Capital, addressed the point in The High Value of Taking Customer Due Diligence to the Next Level in A Buy and Build Environment, a 2018 piece from Strategex, a firm that sells customer diligence research. "The value is created at the customer relationship."
T4 Associates, another such firm, reports in Customer Due Diligence in Private Equity that across more than 185 engagements for more than 60 private equity firms, 1 in 11 turned up a problem serious enough to end the deal. That is one firm's account of its own work, not an independent measure, but the direction fits the logic above.
Skip the satisfaction rating, because customers will call almost any vendor acceptable. Ask for specifics. How did leadership respond the last time a service failure hit? What would it take to move the business elsewhere? If a competitor offered the same functionality at a lower price, what would stop a switch?
Whose Loyalty Is the Company Actually Buying
When a founder or a gifted sales leader holds the key accounts personally, customer trust may not transfer with the ownership. Listen for who the relationship belongs to, and ask what happens when that person leaves. Notice what customers can't name, too. If they struggle to say what they would miss, switching cost is doing the work, not the product.
The Former Employees Nobody Calls
Customers tell you about demand. Former employees tell you about the company itself. A steady exit from one team points to a manager, a pay structure, or a promise that wasn't kept. Former executives who left in the past 12 to 24 months can describe deferred spending, technical debt, and pressure on results that a financial schedule can't show.
Daniel R. Denison and Ia Ko list former executives, customers, vendors, channel partners, and former employees as early-stage interview sources in Cultural Due Diligence in Mergers and Acquisitions, a 2016 chapter in Advances in Mergers and Acquisitions. They also note that interviewing a target's leaders and employees before a deal is final can be difficult and, in some settings, unlawful.
Kroll describes one payoff in Case Study: Next-Generation Due Diligence, published in 2022. After public-record research found only minor violations, interviews with more than a dozen former employees produced detailed accounts of alleged hazardous waste violations and falsified inspection records, and the buyer used them in negotiations. It is Kroll's account of an unnamed client, so treat it as an illustration.
Harding and Rouse open with Bank One's 1998 acquisition of First Chicago NBD. Within 3 years, none of the 16 executives chosen to run the combined company remained.
Former employees speak from one vantage point, and motives vary. When several former leaders independently describe the same failure, treat it as a pattern, and never build a case on one vivid story. Legal limits apply as well. Confidentiality agreements, non-disparagement clauses, employment law, and data protection rules differ by country and sometimes within one. Involve counsel and the seller, and never ask anyone to breach an obligation they owe.
Listening for Gaps Between the Story and the Evidence
The most useful answer is often the one that doesn't match. When management calls retention a strength and customers describe declining service, the gap is a diligence question. When executives describe decentralized decision-making and former employees say choices stopped at the founder's desk, the discrepancy matters more than either account alone. When margins improve while customers say they won't accept the next price increase, the historical numbers can be accurate and the forward assumption still wrong.
Cristina Ferrer, Robert Uhlaner, and Andy West of McKinsey & Company wrote in M&A as competitive advantage in 2013 that for many companies the link between strategy and a transaction breaks during diligence. By concentrating on financial, legal, tax, and operating questions, typical teams miss the data needed to test whether the strategic vision holds. Their remedy is strategic diligence that tests the deal's rationale against the more detailed information available after a letter of intent.
So diligence the assumptions that make the company worth buying. If the thesis assumes durable customer relationships, test them. If it assumes capability that transfers, test whether it lives in systems or in people.
Running Calls That Can Change a Decision
Set the rules before the first call goes out:
Ask for a revenue-weighted list instead of a curated one, and include accounts that have left or shrunk.
Put someone on the phone who has no stake in the deal closing and the seniority to probe.
Agree with the seller on timing, on who makes contact, and on what customers are told.
Write down, before any call, which answers would change the price, the structure, or the decision to proceed.
The last item does the most work. Without it, every troubling answer gets explained away. With it, you have agreed in advance what a bad answer means.
Read the raw material, not the summary. Duncan Painter, introduced as chief executive of Ascential plc on the ECI Partners podcast Building Successful Businesses podcast: Duncan Painter, Ep4, says he asks for full verbatims of customer interviews and often meets customers himself. He calls that "the number one best source of information about a company" he might acquire. Summaries strip out the hesitation before an answer and the qualification after an endorsement.
Timing matters as much. A finding that lands after the price is set changes little, so move the calls earlier. In an auction, the ICAEW guideline notes that competing buyers are generally barred from contacting customers, so confirmatory calls typically come after the final rounds. Sellers will worry about disruption, but well-run reference calls protect relationships instead of straining them.
What you learn should change the paper. Findings can shape price, earn-out structure, key-person retention agreements, indemnities, and Day-1 priorities. The ICAEW guideline notes that identifying customer exposure early lets a buyer adjust strategy, negotiate better terms, or reconsider the transaction altogether. A troubling call doesn't justify walking away by itself. Base the decision on corroborated evidence, materiality, and how directly the finding touches the deal thesis.
The Same Calls Can Save a Deal
Reference calls don't only kill deals. In Tougher Times: Putting the Diligence Back in Due Diligence, Bain & Company describes a medical diagnostic company that considered walking away from an acquisition when it and the target couldn't agree on price. Before it did, the company took a harder look at pipeline products not yet on the market. Products without a sales record leave little for the financials to prove, so it ran extensive interviews with experts and customers instead. Those interviews gave it enough confidence in the products' potential value to raise its own offer and complete the deal. Bain doesn't name the company or the size of the increase.
I don't see the goal of diligence as finding a reason to say no. It is to understand the operating reality you will own the moment the contract is signed. A deal that stops because credible outside evidence invalidates a central assumption has done what diligence is supposed to do, and the cost of buying the wrong company is larger and arrives later.
If you plan to sell, the lesson runs the other way. You can't repair a damaged customer relationship or an executive exodus during a diligence window. Build customer relationships that survive a leadership change, keep governance transparent, and treat former employees with respect. Then call your own largest customers and a few former employees before a buyer does.
Financials describe the past. The calls show whether it will hold. Before your next deal reaches that stage, decide what answer would change your mind, and make sure someone on the team is free to bring it back to you. What would a customer or a former colleague tell you that the data room can't?
This article offers general educational information about business practice and is not legal, financial, tax, or investment advice. Rules on confidentiality, employment, data protection, and contact with customers and former employees vary by country and jurisdiction, so consult qualified professionals before acting.
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