3 Reasons Why Private Equity Firms Should Diagnose Revenue Operations During Due Diligence
The due diligence phase of a private equity deal is often compared to the inspection process when buying a new home. Buyers are looking for any serious problems or red flags with a property (in this case, a business) before closing.
But for the home inspection analogy to work, you must also consider that most problems are fixable if discovered early enough. If the plumbing is bad, you can replace the pipes before any catastrophic leaks occur. If there’s mold in the basement, you can get remediation done before moving your family in. Essentially, if the house has a solid foundation and good bones, you can invest in the necessary improvements to increase its value and make it a great place to live.
Investing significant capital in a company without looking at its marketing and sales operations (which we call revenue operations or RevOps) is kind of like buying a house based solely on price and location. Sure, it may look good on paper, but is it move-in ready?
Read on for three reasons why diagnosing a company’s RevOps functions during the due diligence phase is a smart investment decision.
1 - Get a head start on improving RevOps efficiency
Your firm likely chooses to invest in a company based on its innovative product or market-leading service. But that excellence isn’t scalable if there are dynamics at play that limit the company’s growth potential.
Typically, the due diligence period is spent looking at company financials, legal documents, service contracts, patents, etc. In most cases, equity partners aren’t able to execute a deep dive into the sales funnel, marketing, or operational efficiency of the business until well after the deal is done.
If this is the case, you may have to wait three to nine months (or longer) to see quarterly earnings to measure the efficacy of the organization’s sales and marketing processes. And if it's determined that the organization needs to bring in a new sales or marketing leader, the hiring process can tack on even more time (and you can only hope they bring in the right people for the job). At this point, you’ve lost valuable time that could’ve been spent implementing new sales and marketing tech, building more efficient processes or ramping up key new hires.
In many cases, you may already be aware that a company’s sales or marketing functions are struggling, but you don’t have enough information to know exactly why. By reviewing revenue operations during due diligence instead of waiting for a board meeting or business review phase, you can start with an actionable plan to address those issues on day one, and give your portco a valuable headstart on sustainable growth.
2 - Uncover risks to the business
To truly maximize the due diligence period, investment firms should look at the revenue operations and lead conversion funnel between sales, marketing and customer success, and find any gaps or opportunities for improvement.
If you can get in earlier and identify what’s working well and where things are broken, you can start addressing problems on day one, reducing risk to the business.
For example, if the sales conversion rate is too low, maybe marketing or the Business Development team is not generating enough leads that fit the ideal client profile. Or, if opportunities are getting stuck between certain stages, you may need to take a closer look at what is happening and where the process is breaking down. By doing this bottoms-up diagnosis, you can see how the existing sales and marketing programs are (or are not) delivering and what changes need to be made to hit revenue and growth targets.
It’s also worth noting that, in most cases, portfolio company leaders truly appreciate any industry expertise and guidance you have to offer. And while they may be great at motivating their team or delivering innovative solutions, they may not have extensive experience connecting and improving marketing, sales and customer service to grow revenue.
According to Harvard Business Review, 64% of companies are eager to have their PE firm’s help developing the company strategy. The more insight you have to offer them from a RevOps perspective, the better for everyone.
Metrics to track
To identify risk, it’s important to test the company’s revenue model to find broken processes or bottlenecks in the funnel. You can start by looking at historical data from at least the last 13 months, including metrics like:
Leads (SQLs/MQLs, SALs)
Pipeline coverage
Meetings booked
Closing percentages
Average selling price (ASP)
Cost per lead/cost per acquisition
Any other metrics you’re tracking before the creation of an opportunity
Risks to watch for
As you review the pipeline data and dig into the current processes, here are a few common risks to look for and investigate further:
Price risk: Lower ASP due to discounting or lack of big deals
Conversion risk: Underperforming marketing programs or sales cycles
Hiring risk: Inability to staff up to plan and execute
Enablement risk: Lag in new hires coming up to speed
Territory risk: New sales regions perform differently than existing
Offering risk: Delays in product roadmap deliveries
Churn risk: Underperformance in customer success and retention
3 - Speed up time to value
Growth partners will often choose to take a step back and let business leaders make their own calls on critical decisions, like the right tech to procure, how to structure sales and marketing processes or when to bring new talent into the organization. But by not providing any additional resources or advice to improve the critical RevOps function, there is a risk that company leaders may not be fully equipped to make those decisions in a high-growth phase, or they may disagree on the best use of incoming funds.
It can help to bring in a neutral third party during the due diligence process who can provide an actionable strategy. They can diagnose the company’s existing revenue operations and present data-driven recommendations. Then, they can supplement your portco’s leadership team and help them understand which levers to pull to create more efficiency and drive faster revenue growth.
When gaps in RevOps processes, people or technology are identified during due diligence, funding can also be set aside and allocated accordingly. This makes alignment across the business much easier, as everyone can see the recommendations and agree on the established next steps for the organization.
A neutral advisor with experience in private equity can kickstart the revenue conversation and help develop an operating plan for the company that optimizes your firm’s investment. By aligning the team around these critical decisions during the due diligence phase, you’re likely to see the value of your investments grow much faster.
