The Private Equity landscape has changed. Firms need to evolve what they measure and how they measure it when completing Due Diligence. What are some examples of these measures and what do they tell us about the acquisition target?

There is no doubt that the Private Equity landscape has evolved.  Lower cost money and more LPs are leading to historical levels of dry powder.  Further, the availability of less acquisition targets with immediate EBDITDA upside is leading to more investment competition and therefore the need for both additional scrutiny as a part of the acquisition process and a clear need for Private Equity firms to differentiate themselves against the other bidders.


In this sellers’ market, a lot of the traditional elements of the Due Diligence process stop a little short of providing the insight that can:


  1. Identify a solid acquisition target (depth of analysis)
  2. Differentiate the Private Equity firm as a value-added partner post close (type of analysis).


Download the Sales Risk Assessment Tool. Using this tool, highlight the risks and develop a mitigation plan to assure success.


The in-depth study of an organization’s organic revenue growth capability is one of the most overlooked parts of the Due Diligence puzzle.  If you are not looking at key predictive metrics within the sales function, you are not identifying the suppressed value within the sales team.


How do you know how to forecast business results without knowing how the potential portfolio company is performing through the sales process? 


Here are three key leading indicators that are often overlooked in Due Diligence and what they might mean for your potential portfolio company:


  1. Participation Rate


    This is my favorite measure of the overall health of a sales team and a very valuable metric that indicates sustainable success.  Very simply, participation rate is the percentage of the sales people that are making their quota or target.


    If you have a sales force of 20 people and 10 people are making plan, you have a 50% participation rate.  This a measure for the sales people only, remove the management from the numerator and the denominator. Obviously, if you have many front line sales managers, you can also measure their participation rate again their target, but for our purposes, we’ll focus just on individual contributor sales people.


    Believe it or not, a participation rate of 60% usually indicates a healthy sales organization.  As a rule, I like to aim for between 60% and 70% participation rate.  Any higher than this and it usually tells me that the quotas and targets are too low.  Depending on compensation policy, for example, if you have multipliers or accelerators, this could indicate considerable value loss on overpaying salespeople.  Lower than 60% and you are dependent upon too few sales people to get you to the overall sales goal.  Consistently lower than 60% month after month is a problem.  This is not a sustainable sales team and there is considerable value suppression with it.  What if two of those successful sale people leave?  There should be no glory in being at 100% as a sales force driven by 20% of the sales people.


  2. Funnel Success Multiple (How healthy is the sales pipeline? – Part 1)


    Does the sales function have the opportunity volume needed to be successful?


    Managing a scaled sales funnel means managing sales probability over time.  If you know your true funnel conversation rates you can plot how many deals you need in different phases in the funnel and you can associate a defined probability of sale to the deals over that time period.


    Once you do this, you can measure points in the timeline (such as 60 days out and 90 days out) and assess the funnel volume by measuring the success multiple needed historically.  Do you need 3x of sales opportunity in the 60 day funnel, do you need 5x, 7x?  What probability (sales stage) do these deals need to be at?  It’s just math and it’s typically based on historical performance with a growth expectation.


    This allows a sales leader to manage along the success continuum of funnel to activity standards.  If the sales person doesn’t have the required funnel at all phases, with the needed volume, the sales leader MUST manage activity level directly.  For Private Equity funnel health within the sales team is an essential measure in diligence. 


  3. Funnel Conversion Rate (How healthy is the sales pipeline? – Part 2)


    Funnel conversation rate is an indicator deal velocity (direction and speed).  It’s a measure of how well deals are flowing through your funnel as opposed to the pure volume and time measure above.


    Let’s assume the potential portfolio company using a CRM tool to manage pipeline and might even be leveraging the Funnel Success Multiple above within that CRM.  Even if you are doing that, how do you know how efficiently deals are flowing through the funnel?  How do you know that deals are not stuck at a stage in the funnel just sitting there making the funnel look healthier than it is?


    Warning: pet peeve alert – I have witnessed sales leaders add a reporting metric in the CRM tool that stack ranks deals that haven’t been updated over time.  I find this very simplistic and it can create question marks around a team’s culture when a sales person is required to update a CRM field with a meaningless update just to get them off a bad list.  There is nothing more damaging to a sales culture than a sales manager asking a sales person to do something superficial.


    Now back to the point – the funnel conversion rate measures the funnel today against where is was 30 days ago (or another timeframe appropriate for the specific sales cycle) and the difference in probability in the same timeframe.  It is a very powerful measure of a team’s velocity and another key measure for a sales leader.


By the way, did you notice that total sales attainment wasn’t listed?  Do you know why?  Well, that is a result, not the leading indicator or a behavioral indicator …..and you don’t need me to tell you that in diligence.  In organic growth diligence we need to assess the indicators, not the results, to understand the suppressed value within the potential acquisition’s sales function.  See our Sales Risk Assessment Tool for more organic revenue topics for your Diligence Projects.


Once you have been successful in the acquisition, see this video on how to create additional Enterprise Value.



Additional Resources


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