Due diligence is defined as a comprehensive appraisal of a business undertaken by a prospective buyer to establish its assets and liabilities and evaluate its growth potential. However, diligence around the actual drivers of growth (i.e., Commercial Diligence) is only now becoming standard practice. Traditionally, commercial optimization opportunities were considered a bonus, above the standard modeling that drove the bid price. But, in today’s high-pressure market, deal partners are realizing that they can’t compete and bid correctly if they don’t factor in these commercial levers, size them and get them into the model during diligence or even during sourcing.
To make this happen, deal partners are having to learn what types of commercial optimization factors to prioritize. Whatever their acquisition’s industry, say revenue cycle management companies, XaaS, or healthcare services, PE firms should evaluate that sub-sector’s five to seven key growth scaling opportunities and management’s willingness to tackle them. To do this, deal teams are developing “playbooks” around the key factors for each vertical sub-sector and using them to, (1) spot growth opportunities upstream during deal sourcing and (2) lean into partnering with like-minded management teams.
Today, during the commercial diligence process, deal partners should also be setting the agenda for the top-line growth improvements in the value creation plan (VCP). Defining commercial opportunities early, during diligence, helps management become more comfortable with the idea of commercial change. Specifically, management responds well when the deal partners can show they clearly understand that sector’s commercial challenges and can use metrics/benchmarks to make a clear business case for commercial changes.
Planning for revenue operations also assumes more importance because of the increased need to monitor/adjust the new model on an ongoing basis. This includes plan rollout, changes to coverage, aligning talent to roles and adjusting sales compensation. Similarly, with the deployment of new models, tools like CRM must also become much more integrated into the daily management oversight and coaching rhythm.
In the following video, Marc Metzner, principal, and William Alton, PE program director, of Alexander Group, provide more detail and practical guidelines for deal and operating partners in pursuing commercial optimization to evaluate key targets, perform due diligence and get management buy-in early in the process.
For more about Alexander Group’s Private Equity practice and the Private Equity Insiders Council, please contact a Private Equity practice lead.