For PE sponsors, every portfolio company must achieve growth to remain a viable and valuable asset. As the market moves away from sellers into the hands of buyers, CEOs must ensure your growth story resonates with potential sponsors. SBI has advised PE firms in reviewing a target’s commercial growth capabilities with a Growth Diligence process.
What is Growth Diligence?
Growth diligence is solely focused on a target's commercial growth capabilities. It differs in that it focuses specifically on one of four key-value creation quadrants and helps a sponsor determine if the asset will perform to their expectations.
CEOs are recommended to plot their organizations in one of the four quadrants, then ask how well your teams are executing to that thesis. This is important for a couple reasons:
- If you're in a hold period with a PE firm, they are scrutinizing your growth plan to these areas.
- If you are in a process, or planning to enter a process in the coming quarters, this can be a guide for what to expect based on your thesis.
PE firms most commonly look at growth diligence across these four categories in Go-to-Market functions, and each category has areas of greater sensitivity. Each lever consists of recommendations and critical operational components for execution.
Top four value creation levers:
- Accelerate growth with the same operating expense
The asset’s GTM spend is in line with current best practice, but growth is insufficient.
Identify the primary productivity levers for fast growth. Review sales and marketing budgets to identify areas of misdirected spending and explore alternative investments to increase top-line revenue quickly. Optimize routes to market to focus coverage on high-value market opportunities.
- Accelerate growth through increases in investment/spend/operating expense
The asset has tremendous potential for future growth. Where can you place your investment bets to help generate outsized growth during your sponsorship?
Perform segmentation to identify which accounts and prospects have high propensity to drive growth then align organizational strategy to capitalize on those opportunities. Start with optimization of sales and marketing functions. Capabilities and enablement are the keys to execution.
- Convert to a more valuable revenue stream and operating model
The revenue model is in transition, or needs to be changed (most commonly from on prem to SaaS/subscription model). How can you transition and ensure not to encounter outsized costs slowing down potential growth?
Evaluate the receptiveness of the market to pricing changes and if transitioning to SaaS, include services in the new pricing model where Services is repurposed as Customer Success. This will increase the average sales price. Then, align Sales and Marketing motions to the new strategy including messaging, campaigns, enablement and sales execution.
- Maintain growth rate at a lower operating expense
The growth of the asset is acceptable, but the costs are above peers and best practices. How do we remove GTM cost without disrupting the current growth trajectory?
Perform a rapid diagnostic to understand areas of spend where higher ROI is possible, leveraging benchmarks to project possible outcomes from cost rationalization. Reduce sales and marketing spend in targeted areas while developing risk mitigation plans to overcome any execution challenges. Then, analyze the impact of Sales and Marketing spend reduction to better understand the impact on revenue.
Growth diligence can start as early as receiving a CIM from a potential target. SBI’s process helps PE firms look at a potential target outward-in to determine if it's an asset or process worth pursuing. CEOs must be able to back up with relevant data in which quadrant you fit. Many companies believe they are in Quadrant 2, when in reality their productivity is low for the spend level (Quadrant 1), or they are spending too much and not growing fast enough (Quadrant 4). If you falsely believe you are in Quadrant 2 and are expecting a higher multiple, but you are really in Quadrant 1 or 4, be prepared for a discounted valuation.
SBI can help CEOs evaluate in which quadrant they fit and advise on how to communicate a growth story to portray an attractive valuation that resonates with potential sponsors.
If you expect to enter a process soon, schedule some time with an experienced Growth Diligence advisor to discuss your plan and what to expect.
