How can you develop a realistic value creation plan for PE deals?

2 Define the value drivers

The second step is to define the value drivers that will generate the most value for the target company and the PE firm. Value drivers are the key factors that influence the revenue growth, margin expansion, and cash flow generation of a business. Examples of value drivers are product innovation, market penetration, pricing strategy, cost reduction, operational excellence, and capital structure optimization. You should select the value drivers that are most relevant and feasible for the target company and the PE firm, and quantify their expected contribution to the value creation.

3 Set the goals and milestones

The third step is to set the goals and milestones that will guide the execution of your VCP. Goals are the specific and measurable outcomes that you want to achieve within a certain time frame, such as increasing the EBITDA margin by 10% in three years. Milestones are the intermediate steps that mark the progress towards your goals, such as launching a new product line in six months. You should set SMART (specific, measurable, achievable, relevant, and time-bound) goals and milestones that align with your value drivers and reflect your ambition and realism.

4 Allocate the resources and responsibilities

The fourth step is to allocate the resources and responsibilities that will enable the implementation of your VCP. Resources are the assets and inputs that you need to execute your VCP, such as capital, talent, technology, and partnerships. Responsibilities are the roles and tasks that you assign to the people and teams that will execute your VCP, such as managers, employees, consultants, and advisors. You should allocate the resources and responsibilities that match the scope and complexity of your VCP and ensure accountability and collaboration.

6 Prepare for the exit

The sixth and final step is to prepare for the exit that will maximize the return on your investment and the value of the target company. Exit is the process of selling or transferring the ownership of the target company to another party, such as a strategic buyer, a financial buyer, or the public market. Preparing for the exit involves evaluating the exit options, timing, and valuation, as well as communicating and negotiating with the potential buyers or investors. You should prepare for the exit early and strategically to showcase the value creation achieved by your VCP and to capture the best deal terms.