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What is the best way to use performance measurement and reporting to identify acquisition targets?

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If you are a private equity (PE) investor, you know that finding and evaluating potential acquisition targets is a crucial part of your strategy. But how do you use performance measurement and reporting to identify the best opportunities in a competitive market? In this article, we will discuss some of the key aspects of using performance data and reports to assess the value, growth potential, and risks of different businesses and sectors.

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1 Performance measurement and reporting basics

Performance measurement and reporting are the processes of collecting, analyzing, and communicating financial and non-financial information about the performance of a business or a portfolio. They help investors to monitor and evaluate the progress, results, and value creation of their investments. Performance measurement and reporting can be done at different levels, such as the individual company, the sector, the fund, or the PE firm.

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Raza Rehman

Internal Audit Manager | Ex-Chief Internal Auditor | Certified Public Accountant - CPA | Masters of Commerce | 15+Years of Experience
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Use industry benchmarks: Compare the target's performance to industry averages and competitors. This will help you assess its relative strengths and weaknesses. Analyze financial statements: Look for trends in revenue, profitability, and cash flow to gauge the target's financial health and growth potential. Evaluate operational efficiency: Analyze metrics like customer acquisition cost, employee productivity, and supply chain efficiency to understand the target's operational strengths and weaknesses. Assess customer satisfaction: Analyze customer satisfaction surveys and loyalty programs to understand the target's customer base and brand perception. Study innovation and technology to Analyze the its innovation potential.

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2 Why performance measurement and reporting matter for PE investors

Performance measurement and reporting are essential for PE investors for several reasons. First, they help to identify the most attractive acquisition targets based on their historical and projected performance, their competitive position, their market potential, and their fit with the investor's strategy and criteria. Second, they help to conduct due diligence and valuation of the target companies, by providing insights into their financial health, operational efficiency, growth drivers, and risk factors. Third, they help to manage and improve the performance of the portfolio companies, by setting goals, tracking progress, identifying issues, and implementing corrective actions.

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Carlos Sava

Merchant bank partner. Strategic CFO and M&A advisor. Interim operator. Value investor. Family office services.
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Performance measurement helps with a relative understanding of how a business compares to its peers. At a simple level and stratification, a business could score poorly (below average), in line with peers (industry average), or be best-in-class (above average). Upon acquisition, this relative performance will factor into the plan for value creation and ultimately, into the exit price if it is able to raise its relative performance.

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3 How to use performance measurement and reporting to identify acquisition targets

To use performance measurement and reporting to identify acquisition targets, PE investors need to follow some steps. First, they need to define their investment strategy and criteria, such as the industry, the size, the stage, the geography, and the return expectations of the target companies. Second, they need to source and screen potential targets based on their performance data and reports, such as revenue, profitability, cash flow, growth rate, market share, customer satisfaction, and innovation. Third, they need to compare and rank the targets based on their relative performance and value creation potential, using metrics such as EBITDA, ROIC, CAGR, EV/EBITDA, and IRR.

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4 What to look for in performance data and reports

When using performance data and reports to identify acquisition targets, PE investors need to look for some key indicators and trends. First, they need to look for strong and consistent performance across different dimensions, such as financial, operational, strategic, and environmental, social, and governance (ESG). Second, they need to look for growth opportunities and competitive advantages, such as new markets, products, customers, channels, or technologies. Third, they need to look for risks and challenges, such as regulatory changes, market disruptions, competitive pressures, or operational issues.

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Carlos Sava

Merchant bank partner. Strategic CFO and M&A advisor. Interim operator. Value investor. Family office services.
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Overlaying changes in economic cycle, regulatory changes, or major competitive entrants can be telling to understand changes in performance data. Ultimately, with leveraged transactions, a significant premium will be paid for consistency, and an understanding of if a business will perform consistently if these economic, regulatory, or competitive dynamics is paramount to the PE owner's assessment of risk and value.

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5 How to improve performance measurement and reporting

To improve performance measurement and reporting, PE investors need to adopt some best practices. First, they need to align the performance measures and reports with their investment objectives and criteria, and ensure that they are relevant, reliable, timely, and comparable. Second, they need to use a balanced mix of quantitative and qualitative measures and reports, and incorporate both financial and non-financial information. Third, they need to communicate and collaborate with the target and portfolio companies, and provide feedback, guidance, and support to enhance their performance and value creation.

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6 How to avoid common pitfalls of performance measurement and reporting

Performance measurement and reporting are not without challenges and limitations, and PE investors need to be aware of some common pitfalls and how to avoid them. First, they need to avoid relying on single or isolated measures or reports, and instead use a comprehensive and holistic approach to assess the performance of the target and portfolio companies. Second, they need to avoid using outdated or inaccurate data or reports, and instead verify and validate the information sources and methods. Third, they need to avoid being biased or influenced by external factors, such as market conditions, peer pressure, or personal preferences, and instead use objective and rational criteria and judgments.

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Carlos Sava

Merchant bank partner. Strategic CFO and M&A advisor. Interim operator. Value investor. Family office services.
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While the numbers matter, they are not an end all, be all. Businesses and valuations still have a story component. The explanations and reasons for changes in the performance measurement need to be supported with qualitative narrative or it will be attributed to luck or broader macro/industry changes.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Raza Rehman

Internal Audit Manager | Ex-Chief Internal Auditor | Certified Public Accountant - CPA | Masters of Commerce | 15+Years of Experience
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Utilize data analytics tools: Invest in data analytics software to help you gather, analyze, and interpret large datasets more efficiently. Benchmark against prior acquisitions: Analyze the success of your previous acquisitions to identify key performance indicators and potential red flags. Involve key stakeholders: Ensure that all relevant stakeholders, such as investors, board members, and executives, are involved in the evaluation process. Seek expert advice: Consult with financial advisors, industry experts, and M&A specialists to gain valuable insights and guidance.

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What is the best way to use performance measurement and reporting to identify acquisition targets?

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1 Performance measurement and reporting basics

2 Why performance measurement and reporting matter for PE investors

3 How to use performance measurement and reporting to identify acquisition targets

4 What to look for in performance data and reports

5 How to improve performance measurement and reporting

6 How to avoid common pitfalls of performance measurement and reporting

7 Here’s what else to consider

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