How Can Investors & Directors Use Sales Evaluations in Transactions?

Ed Marsh | Jan 19, 2024

Tl;dr - Sales team evaluations are an overlooked resource to improve due diligence and accelerate integration and growth of acquisitions. Private equity can use evaluations and sales candidate assessments to harmonize and improve sales performance across their portfolio, and owners, board directors, and executives can improve their M&A results.

Reducing Uncertainty and Accelerating Results

When it comes to a corporate transaction, there's an inherent tradeoff between uncertainty and valuation.

Future cash flows are discounted to account for various factors, including all the known and unknown unknowns that might disrupt the realization of the investment thesis.

So, as sellers seek to maximize their valuation, they'll try to justify to buyers why high returns are a low-risk bet. Buyers will work to understand all the factors that might upend the critical assumptions on which they model their acquisition.

Obviously, there are countless factors at play. Undisclosed environmental, FCPA, and product liability are at one extreme. Product market fit may change as technology and buyer expectations evolve. And financial buyers will view targets differently than strategic acquirers.

But at the core of every valuation decision is the question of revenue. What's the likelihood it will grow? Stagnate? Fall?

While many factors impact revenue, the sales team's proficiency is the fundamental determining factor.

Sometimes, sales are strong, even with weak sales teams. This can be due to brand, unique technology, or important partnerships. Sometimes, sales are weak despite strong sales teams. Pricing, product-market fit, and channel strategy are a few of the many possible causes.

Thoughtful buyers have to ask the following questions about the sales team:

  • can the current sales team drive the growth we're basing our models on?
  • what turnover are we likely to have, and how will that delay progress toward our benchmarks?
  • what results can we expect by bringing some of our best practices to the existing team to improve their performance?
  • how quickly can we integrate this sales effort with our own?

That means that owners, board directors, and executives of financial buyers considering a transaction should expect these answers. They may be equally, or perhaps less important for strategic buyers, depending on how they intend to integrate the business (e.g. acquiring the IP, customer list and geographical market presence to fold into the existing operation, or to continue to stand alone and operate independently.)

If the ability of the current sales team or the likely transition turmoil are important to the decision, then it's important to have statistically accurate tools to make determinations that are otherwise fraught.

That's where sales team evaluations come in. Buyers should demand it as part of their due diligence, and sellers, anticipating the questions, should preemptively provide it.

What a Sales Team Evaluation Does

A sales team evaluation delivers various critical information that's helpful for investors, board directors, and executives considering acquisition and sale. This includes:

  • an estimate of the revenue potential of the current team that could be unlocked with proper sales process, methodology, training and coaching, while accounting for the gap and difficulty in overcoming limitations of the team
  • mapping of team members, their current roles (e.g. inside sales, account management, channel sales, field sales), and their ideal roles
  • an assessment of the company's sales processes and infrastructure
  • detailed understanding of strengths and weaknesses at levels including the sales leadership (e.g. VP), sales management, and each function of individual contributors
  • in depth evaluation of each individual's strengths and weaknesses relative to their role requirements (e.g. often sales managers were top performing reps, but may not be suited for the management role, and "non-selling" professionals like marketing folks must have sales awareness to effectively support the sales effort)
  • graphical, narrative, and tabulated (spreadsheet) data to aid in digesting the findings
  • information to support root cause analysis of sales frustrations (e.g. reviewing the pipeline finds deals that never close and/or end in "no decision", and the evaluation can identify what in the sales team/sales process leads to that outcome so that judgments can be made on the resources and time required to improve

This information, in aggregate, provides a comprehensive organizational understanding and detailed insight into each member.

A seller can use the insights as part of an effort to improve prior to a transaction (or at least create a plan for the buyer) while a buyer can use it to quantify and anticipate the integration challenges.

What's Involved and How Does it Help

The process of conducting a team evaluation is straightforward. 

  • two - three hours of admin and organizational effort
  • approximately 45 minutes for each participant to complete an online evaluation
  • two-three hours of reporting/debrief time once the results are available

Normally it takes four to five weeks from the decision to proceed through the full debrief.

For a buyer, the outcomes help in a variety of ways.

  • Realistic understanding of the revenue growth function they may acquire, what it will take to improve, what revenue impact improving the current team will have, what percentage of the team they are likely to have to replace, and the strenth of management
  • A detailed roadmap for changes required (improving sales process, training on a methodology, replacing certain players - often sales managers, and prioritization for training areas)
  • Discovering latent potential in underperforming players who could be significantly and quickly improved
  • Root cause analysis to understand performance in a larger context
  • Comparison to sales team evaluations and post transaction results from previous acquisitions if they use the evaluations routinely
  • Accurate insights into individual performance and potential, untainted by the relationships and history that often cloud the judgment of middle market privately held company leadership (and family businesses)

Of course all of this hinges on the statistical validity of the results. The tools I use with clients have an independently verified 91% predictive validity and incorporate insights from evaluations of nearly 3,000,000 salespeople.

Accelerating Quickly After a Transaction

sales-team-evaluation-revenue-growth-estimateOnce the closing happens, the hard work begins. While there are countless operational details involved in syncing systems and reporting, it's critical that the sales team immediately gets traction and accelerates.

On top of the invaluable insights an evaluation provides as part of due diligence, equally important is its potential to allow management to quickly improve sales performance.

The specific estimate of unrealized revenue to be unlocked with sales improvements of the existing team provides a convenient and justifiable target for medium-term improvement.

The coaching and training recommendations provide a roadmap to unlock that potential.

And the insights regarding each team member, their best fit, and particular strengths and opportunities for growth can be used to help guide each in their integration journey helping them to feel as though the new owner is interested in helping them succeed personally.

Other considerations

This discussion of sales team evaluations raises some related points.

  1. Companies should think about how to make their revenue growth IP a strategic asset alongside their product and market IP. That's the topic of my articles on Axial and on this site. More of my (articles on Axial here.)
  2. A sales team evaluation isn't just for use during due diligence. It's a valuable tool for business with no imminent transaction but a natural desire to improve sales effectiveness and to optimize performance (e.g. boost portfolio performance with common best practices.)
  3. Often a transaction results in sales force turnover. That's not necessarily bad, but it creates a need to backfill with better talent. Sales candidate assessments, a companion solution to sales team evaluations, bring the same predictive accuracy to hiring sales talent. This enables firms to add 2nd and 3rd standard deviation talent, and to reduce the subsequent turnover. Across large portfolios of companies, consistency and success in sales hiring can represent a huge boon in reduced costs (empty territories, ramp up, recruiter fees) and boost in revenue through the addition to top talent.
  4. If you're interested in creative tools and perspectives for more effective due diligence, check out how 3rd party intent data can be used as an additional tool.

Revenue Growth Can be Engineered Just Like Production, Operations and Finance

Sales evaluations and candidate assessments are examples of an integrated framework approach to revenue growth. 

A comprehensive framework which considers strategy, marketing, sales and technology (like Overall Revenue Effectiveness™) can be used to improve performance, prepare a company for sales, perform methodical due diligence on a possible acquisition, and guide efforts to quickly integrate and improve an acquired business.

And naturally, selecting the right tools is an important consideration.