Is your portfolio company’s sales force a wise investment?By: Alexander Group Private Equity
Private equity managers and investment teams are chartered with the daunting task of evaluating and investing in companies that will generate significant returns for their investors. There are a myriad of critical variables to consider including the company’s leadership, financial health, market size, customers, and product/service features and benefits. One critical variable is often overlooked, the sales organization.
A well designed sales organization is not only a reflection of a company’s strategy and market but also a leading indicator of potential success in terms of both growth and profitability. The health of the sales force, in a sense, foreshadows the level of effort that will be required to transform the organization. A stodgy, product-focused, “farming”-oriented sales force will require far more work to change and realize new growth opportunities compared with an agile, customer value-focused organization. And the level of effort to transform the sales force directly impacts your ability to optimize your return within the desired payback period.
Over the past 24 months, the Alexander Group has had the opportunity to work with dozens of portfolio companies owned by some of the largest private equity firms in the world. The scope of these engagements has ranged from sales force due diligence, to sales compensation design, to full scale, sales transformation and restructuring. The question posed is nearly always the same…Is the portfolio company’s sales force a wise investment?
Answering this question is no trivial matter. Often the timing is paramount to the ongoing financial viability of the portfolio company or linked to a desired liquidity event. As private equity managers and, ultimately, as board members, you should start by reflecting on the following set of questions:
The answers to the aforementioned questions and the resulting actions can be the difference between a successful investment outcome for you and your investors or a total loss.
As a result of the engagements that the Alexander Group has conducted on behalf of private equity firms and/or with their portfolio companies, here are four (4) rules to guide you in answering the question…Is the portfolio company’s sales force a wise investment?
#1 Include the Sales Organization in Your Due Diligence. It’s never too early to begin evaluating the efficiency and effectiveness of the sales organization. This work should commence during the due diligence process. Benchmark a simple set of metrics such as revenue per rep, bookings and/or revenue quota sizes, mix of deals – new versus existing customers, manager to rep and rep to support ratios and sales compensation expense to industry peers to name a few.
#2 Define an Investment Focus for the Sales Organization. Treat the sales organization as a separate investment vehicle or entity and define the appropriate strategy for it (e.g., topline growth or maximizing profitability). Your decisions on the investment strategy for the sales organization have repercussions not only on headcount levels but also on customer segmentation, account targeting, routes to market and sales enablement.
#3 Develop a Future-State Blueprint. Sales organizations evolve naturally over the course of time with the entrance to new markets, the addition of new customer segments and product introductions. To support this, a healthy sales organization must be continuously updated to reduce the risk of inefficiencies and obsolescence. The Future-State Blueprint outlines the direction and key changes required which helps inform the broader change management strategy.
#4 Don’t Wait Until It’s Too Late. On a number of occasions the Alexander Group has been asked to come in to “fix” a sales organization in the 11th hour. While it is possible to take cost out of the sales organization just like any other corporate function, driving growth or significant growth to “save” a company can be quite challenging. Remember, changes to sales strategy, structure or execution require sales reps and management to modify their behavior. Behavioral modification and adoption takes time. A typical sales transformation has a time to benefit of 6 to 12 months and an ROI that is 12 to 18 months or beyond.
To learn more about sales force due diligence and sales force transformation, please go to www.alexandergroup.com/industries/private-equity.
Originally published by: Jeff Hersh