Increased competition for PE deals means you are paying more. So being able to generate consistent organic revenue growth across the lifecycle of an investment needs to play a greater role. However, you may not have the time or the domain experience to understand the growth potential of a business to get the due diligence right on every deal.
As the first step in the Lifecycle Approach to Value Creation, exceptional due diligence sets the stage for achieving and exceeding growth targets across the investment lifecycle.
Ask the Important Pre-signing Questions
An in-depth assessment of growth potential answers the important pre-signing questions.
Analogous to a Quality of Earnings Report, an Assessment of Growth Potential tells you if a company has the market and customer insights, talent, processes, programs, and technology necessary to operate a highly functioning growth engine.
While sizing the market opportunity is often a well-defined part of due diligence, what it will take to truly be successful in converting the opportunity into revenue is often missing. The right industry domain expertise and operational savvy applied to generate such a report or its equivalent in the due diligence phase exposes the hidden risks and strengths of the opportunity and confirms or invalidates the investment and ability to deliver on the value creation plan. Don’t sign without it.
A quality Assessment of Growth Potential provides answers to the following key questions and more:
Customer Insights
- Have they zeroed in on segments of the market for which they understand the drivers, health, and viability and have plans aligned against those segments?
- Have they developed clear and well-defined personas, and do they know how to reach and activate effective programs against those personas?
Talent/Organization
- What is the marketing and sales structure? Is it effective?
- How effective is the key marketing leadership?
- Do they have the right people with the right experience on the team?
Marketing Engine
- How strong is the brand, do they have a well-articulated positioning and consistently activate that position in the market?
- Do they have sales and marketing operational planning (SMOP) in place?
- How is their execution for lead generation, content creation and management, marcom, and supporting agencies?
- Do they really understand the customer experience?
- Have they gathered voice of the customer feedback?
- Do they track loyalty with NPS and reviews?
Sales Operations
- Do they practice effective account management?
- Do they follow a clear sales planning process with pipeline management and forecasting?
Technology (Martech Stack)
- Do they have marketing automation and CRM systems?
- How is their web development and design?
Financial
- Do they have clear budget and spending KPIs?
- Do they have dashboards that help them accurately measure and understand the performance of the business?
Build Confidence in the Value Creation Plan
Obtaining quality answers to these questions helps to build confidence in the investment and avoid costly mistakes. For example, past performance is not an indicator of future growth. Just because the company has been growing at 10 percent for the last three years doesn't mean that what they have in place will take them from 10 to 20 percent over the next three years. So, it is risky to model it that way.
You can't assume that it’s built to scale in a predictable and stable fashion. The operating context, customer profiles, and competition change as a company’s growth develops. You need to apply industry expertise and operational savvy to get a current and accurate assessment.
Common Gaps
When you get into evaluating an investment, you often find real gaps in the organization. If you worked from a model, it’s painful to realize later that you actually don't have in the marketing organization the skill set or capability to do what you need them to do. Often, they don't understand their customer well, and the opportunity isn't as clear and compelling once you dig into it. Are they boosting performance by spending in a certain way or giving discounts that boost revenue performance in the short term that might not be viable over the longer term? It may look good on the surface but digging deeper may reveal that it's not sustainable.
Sustainable Growth
Assessing growth potential and understanding how to unlock it in the due diligence phase is one of the keys to maximizing growth and value creation. It requires asking the right questions and a slightly different approach to evaluating growth potential grounded in operational reality.
It all comes down to this: knowing that the organization is able to generate sustainable growth moving forward is paramount.
Slade Kobran is Managing Partner, Private Equity at Chief Outsiders. He supports private equity portfolio company growth and value creation as GPs seek to deliver differentiated returns to their investors.
