It seems that there is often a disconnect between private equity firms’ goals for mid-market investments and the amount of energy they devote to understanding the functions that support those goals. Research shows that—especially in the mid-market—growth is typically the cornerstone of a PE firm’s investment thesis. This makes intuitive sense; where targets are of smaller scale, there will naturally be fewer cost efficiency opportunities. Unfortunately, we often see that our PE clients’ goal of scaling a business doesn’t match the level of effort put into understanding how well that business is fit to scale.
While commercial diligence (in some form) is a standard component of every deal, it is typically at a level of altitude well above what’s needed to understand whether the target has the specific capabilities and resources needed to execute growth plans…and what is required to fill any gaps that may exist.
We believe that a next-level-down assessment of a target’s “revenue engine”—the marketing and sales activities that fuel growth—is necessary in order to have a fully-informed view of a target’s growth potential, plus the levers that a PE buyer would need to pull in order to unlock that potential.
This involves understanding the details of the sales and marketing function, including but not limited to:
- Is target focused on the right segments, or treating all revenue the same?
- Does target have a clear picture of customers—who buys, who influences, and what drives purchase decisions—in the most attractive segments?
- Is target’s marketing mix optimized to how customers build awareness and consideration?
- Does target have the marketing and sales skills and roles needed to execute an effective go-to-market strategy?
- Has target set appropriate metrics and targets for Marketing and Sales activities?
- Does target have effective processes, tools and technologies to support all phases in the sales and delivery cycle?
These actions may sound fairly straightforward, but it’s my experience that PE firms tend to focus on cost efficiencies as financial analysis is more squarely in their wheelhouse. As opposed to traditional commercial diligence, these questions regarding the target’s revenue engine are designed to not only inform our PE client’s investment thesis but also provide highly tactical, actionable insight into how a target’s Marketing and Sales teams can begin to execute more effectively on day 1.