Quantifying The Soft: How Private Equity Can Successfully Exit Acquisitions Faster Through Hardest To Measure Areas

Soft skills are typically interpersonal and character-based attributes that are challenging to quantify and measure objectively. When Private Equity investors are acquiring companies, these soft skills may play a crucial role, but they are often difficult to assess quantitatively. Here are some examples of business areas related to soft skills that investors may find hard to quantify:

1.??? Leadership Style: Inspirational leadership, adaptive leadership, emotional intelligence.

2.??? Corporate Culture: Team collaboration, employee engagement, cultural fit.

3.??? Communication Skills: Effective communication, active listening, conflict resolution.

4.??? Adaptability and Agility: Openness to change, ability to pivot, resilience.

5.??? Creativity and Innovation: Problem-solving, thinking outside the box, exploring new ideas.

6.??? Customer Relationship Management: Customer-centricity, relationship building, satisfaction.

7.??? Negotiation Skills: Complex negotiations, win-win strategies, resolving conflicts.

8.??? Conflict Resolution: Managing internal conflicts, handling disputes, positive environment.

9.??? Time Management: Prioritization, efficiency, meeting deadlines.

10.? Ethical Decision Making: Integrity, corporate social responsibility, ethical practices.

11.??Networking Abilities: Industry relationships, partnerships, influence

12.? Team Building: Positive culture, effective teams, encouraging collaboration.

Private equity investors clearly recognize the significance of these soft attributes, and often tout their importance, but they struggle to consistently and adequately measure them during the flurry of challenges during due diligence and post-acquisition. As a result, they often rely on a mix of quantitative and qualitative assessments to evaluate a company holistically, or gloss over the softer areas of their acquisitions.

However, undervaluing the impact of "soft" people-related issues is risky in acquisitions. Things like poor leadership, negative culture, diminishing employee engagement and loyalty, poor communications with customers, and lack of agility can drive high attrition, stagnating growth and poor exits despite strong financials. This is why purely financial models have limitations.

Emerging Approaches for “Quantifying The Soft?”

Innovative PE leaders are now looking for tangible ways to quantify soft attributes by borrowing concepts from customer predictive analytics:

1.??? Employee Experience Scores: Engagement and retention risk indices based on surveys.

2.??? Cultural Integration Scores: Quantified diagnostics to flag post-merger dysfunction.

3.??? Leadership Vision Ratings: Expert and employee assessments of management quality.

4.??? Innovation Quotient: Benchmarking pipeline and talent metrics versus peers.

5.??? Corporate Governance Ratings: Standardized measures of ethics and sustainability in industries where these are most essential.

Similar to how customer health metrics like Net Promoter Scores evolved, these could become auditable benchmarks for company culture and other intangibles. Investors can then continuously monitor the people-related risks.

Implications of “Quantifying The Soft?” Factors

If soft attributes become truly quantifiable, it can profoundly impact how PE firms assess acquisition targets:

???Deals could confidently value strong leadership, culture and innovation more highly in pricing models.

?? Companies may invest more in developing branded, cultural and strategic assets.

???Boards could have more confidence evaluating executives beyond just financial performance.

??Greater focus on longer-term stewardship may tangibly demonstrate greater gains for investors.

In essence, the ability to objectively quantify soft skills and tie them to value creation, risk mitigation, and reduction of costly post-acquisition friction has the potential to steer businesses towards greater sustainable growth models. It could enable investors to incorporate the intangible assets into due diligence and better monitor post-acquisition trajectories - translating into faster and more successful exits.