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Historically, asset-based businesses have acquired, maintained and sweated assets for business growth. And while that still holds today, companies also have new assets that can be used to create value: technology.

Middle market businesses require more technology assets and transformation initiatives not only to keep up in competitive markets but also to drive growth and value for a potential future exit to private equity.

If you’re looking to enhance your value creation strategy and build a high-performing business, it’s critical to start thinking like technologists and private equity firms.

Adding technology to your value creation strategy

Technology’s role in operational excellence and value creation measurement is becoming essential to sell-side due diligence as it increasingly drives the future of middle market deals.

Value creation, in relation to technology assets, is growth at a rate above the cost of capital while building a cost-optimized, scalable business model. This business model is created through a modern and agile tech stack led by visionary and focused leadership teams and human capital. It also requires organized, real-time data that can drive business decisions.

The ability for sellers to demonstrate technology fluency in a cost-optimized model with leadership putting value on the asset can make or break valuations and sale multiples. Additionally, sellers should be aware that pushing technology debt from one owner to another will be unacceptable for those looking for outsized multiples at sale.

IT due diligence

PE investors and sellers are measuring the value of technology assets through IT due diligence, which creates a level-setting document of enterprise assets.

IT due diligence provides a financial number on the current value of a business’s tech stack. That number can include systems such as ERP and software that lays on top of ERP to provide further optics, CRM and other potential financial or operational reporting systems.

It would also include a review of age and quality of assets, for example:

• How old is the CRM?
• Is the ERP still supported?
• Would a replacement ERP only be available in a cloud infrastructure model?
• Who manages the cybersecurity posture either internally or externally?
• Are cybersecurity practices updated and relevant to the growth and future of the business?

While IT due diligence can help guide underwriting the replacement and upgrading of systems, it would not assess:

• The cleanliness and organization of the underlying data that feeds the systems.
• The readiness and quality of the data for more future-looking uses like predictive modeling and AI.

The tech stack needed to drive growth

The middle market has expansive opportunities to build and monetize technology assets. Even in heavy asset-based industries, such as manufacturing, businesses can build their own technology assets. For example, manufacturers can deploy IOT and leverage real-time production data.

Here are three ways you can use technology to enhance value creation:

Cloud-based infrastructure

The ability to articulate cloud infrastructure at transaction can add value to your business.

Cloud versus on-premises servers can provide a better cost structure and business model that allows for the development of innovative technology while using the production environment to run the business. It can also offer better computing, storage and power economics than on-premises servers.

Clean, accessible data

Data is a democratizer, allowing small firms to compete with larger ones. In recent years, the cost of on-premises or cloud infrastructure data warehousing has decreased and become more accessible to more companies.

Data is the foundation of reporting accuracy and operational effectiveness, as well as the core of initiatives such as predictive modeling and AI. Data also drives historical analysis of reporting trends, current quarter results and future potential uses.

To leverage these use cases and data-based decision-making, data must be collected, cleaned, curated, managed, secured and consumed.

CRM: Establishing a known, good commercial dataset

Commercial leaders — including a chief resource officer (CRO) or sales and marketing vice president — need data to drive organizational growth.

While using complex pivot tables can approximate pipelines and other reporting, they’re not sophisticated enough. Pivot tables are prone to errors and missed opportunities, and they don’t allow for scaled growth or ease of M&A integration of add-ons.

Instead, a CRM system is vital to sales success and transformation.

Having firmwide buy-in for CRM from the leadership provides a known, good data set to drive reporting, KPIs and progress measurement on growth goals.  

CRM also provides greater insight into critical measures such as:

• Client and target prospect tendencies.
• Stages of sale engagement, time in the pipeline and velocity.
• How to engage the stages correctly to gain a win or close.  

These stages of the prospect or client experience are vital to measure in aggregate when evaluating all client-facing and interfacing professionals.

Technology value creation in action

One example of using technology assets to build value is through data-driven sales.

Cross-sell, upsell and pricing are controllable levers that executive leadership teams can use to impact the top line. Your organization can use technology to accelerate value creation by aligning on integrated reporting, developing a data culture and quickly rolling out a one-company approach with cross-selling.

Step 1: Know your data

Access to data and reporting allows stakeholders to understand the client composition of the firm’s top quadrant better and determine if you have the basis for a robust key client program. It also helps you determine if there is a pace and path to selling new products and features.

When leveraging this data, compensation incentives and alignment to growth goals and KPIs need to be created. Selling more new products to existing customers will be less expensive than acquiring new clients, so organize around upselling and cross-selling.

Step 2: Assess top quadrant clients

The Illinois Tool Works (ITW) 80/20 model can be used as a starting point to assess top quadrant clients, products and services. ITW 80/20 lets you quickly see if your top quadrant of clients buys the highest percentage of top quadrant SKU(s)/offerings.

This analysis, in tandem with CRM, allows a CRO to determine and consider key commercial measures, including:

• Lifetime client value.
• The role of margin and how compensation can be aligned.
• How a key account program can drive outsized growth.

With this data, leadership can create new pricing options that strengthen cross-selling and drive new revenue from newly discovered pricing power.

Top revenue clients should be getting the greatest focus so that you can increase revenue. And pricing can be used as a lever for the remaining quadrants to adjust behaviors and drive top line growth.

Step 3: Pricing review

Pricing review starts with data. Your business will need insight into trends, including:

• What is the pricing policy regarding discounts (agreed, discretionary or one-time)?
• What is the trend line for pricing?
• What is the pricing of new products/services or feature upgrades relative to the legacy product?

Considering all of these, along with customer experience, can help you understand elasticity and paths to increasing revenue.

Why Wipfli?

Private equity firms and their portfolio company leaders must continuously drive transformation and prioritize value-creating initiatives. Wipfli has served the middle market for decades, with extensive experience in industries ranging from healthcare to manufacturing and distribution. We take an integrated approach, using our comprehensive suite of services to help both buyers and sellers define and drive value creation initiatives.

Contact us today to learn more about how we can support your growth.