What is a Value Creation Plan?
In private equity, a value creation plan is a strategic document that outlines how an investor intends to turn a profit from a business venture, and often includes detailed plans for resource allocation and other operations.
It serves as a roadmap for companies to identify, create, and realise the maximum amount of value from the resource available to them.
Value Creation in the "Operational Improvement Era"
Over the past 4 decades, private equity firms have moved from valuing companies based on past successes to instead looking at their potential for improvement and growth.
In the 1980s only 18% of private equity value was attributed to operational improvement and 51% to leverage. In the 2010s these values had practically flipped, with an impressive 54% of value attributed to operational improvements and only 17% to leverage.
The emergence of digitisation in the past 10 years has amplified this, with operational improvements becoming faster, cheaper, and more efficient. This has been particularly evident in areas such as marketing and customer service, where digital technologies have allowed firms to reach new heights in terms of targeting and engaging customers.
The 2020s are already set to be defined by the inclusion of AI and machine learning in the value creation process, allowing businesses to automate many manual processes and unlock new growth opportunities.
In light of this shift towards operational improvements as the primary source of value, having a detailed and effective value creation plan has become essential for firms looking to maximise their returns on investments.
Benefits of Value Creation Planning
Before developing a value creation plan, it’s useful to first have in mind the benefits it will bring to private equity companies.
1. Confident investment decision-making
PE opportunities to generate alpha are expected to remain competitive in the coming year, so it’s more important than ever for firms to confidently identify and invest in companies with strong value creation prospects.
A detailed value creation plan will provide a clear framework for assessing opportunities, as well as help firms avoid overpaying for companies with limited potential for improvement.
2. Expedite due diligence process
For many, due diligence is the most arduous and time-consuming stage of the investment process. Having a clear and concise value creation plan will help you assess what specific information you need from the company to and streamline the due-diligence process.
3. Early collaboration with management
By building a value creation plan early in the deals process, you can be transparent with management about what improvements will be expected of them post-closing. This approach helps foster an environment of collaboration and trust that is essential to successful change management.
4. Hit the ground running
Time is money, and a detailed and considered valuation plan that’s ready to go before closing will help your firm hit the ground running with value creation initiatives. With everything agreed upon in advance, investors can confidently put their plans straight into action from the very start, be it discontinuing a product line, launching a new digital platform, or making structural changes to the organisation.
5 Steps To Crafting A Value Creation Plan
1. Research existing processes
Before you can start making changes, you need to understand how the company currently operates, what’s working, and where there’s clear room for development. This includes analysing customer data and market trends.
At Symanto, our suite of natural language processing technology can quickly analyse consumer and market trend data from online conversations on social media, reviews, reports, CRM data, and much more.
Our aspect-based sentiment analysis, for example, can help you quickly identify which products or services are perceived positively by the target audience. Other metrics such as brand loyalty and recommendation scores can give you an assessment of brand equity; invaluable data to help inform your value creation plan.
Since Symanto leverages publicly available data, you can start your research right away, without the need for internal data or time-consuming manual analysis.
2. Identify areas for growth
Once you’ve completed your research, it’s time to explore the areas of growth and improvement that can drive value for the company.
Ideally, you want to identify the most direct and efficient changes that will deliver the greatest return on investment. This might include opening your services to a new market segment, switching up your pricing strategy, or streamlining internal processes.
However, you also need to make sure your proposed changes match up with the company’s strengths. For example, if you’ve established that the company has valuable talent and a great work culture, you will want to focus on encouraging and utilising this resource rather than making drastic changes to existing personnel and disrupting the internal environment.
3. Set actionable goals and KPIs
Now that you have identified the areas of growth, it’s time to get S.M.A.R.T.
S.M.A.R.T is an acronym that stands for Specific, Measurable, Attainable, Relevant, and Time-bound. It’s a useful guide for ensuring you’re setting clear and realistic objectives with measurable success criteria that are conducive to success. It’s used in many aspects of business, such as project management and leadership, and can be applied to your value creation plan.
4. Create roadmaps
Once you have set your objectives, it’s time to create a roadmap for achieving them. This is where you need to identify any potential challenges, who will be responsible for each task, and when they are expected to be completed.
Now is also the time to determine what resources are needed to reach your objectives. This could include funds for new hires or investments in technology, or the time required from existing personnel to complete certain tasks.
Being mindful of the resources available and what can be realistically achieved in a given timeframe will help you to prioritise your goals and focus on initiatives that have the greatest chance of success.
5. Monitor progress
This final step is the only post-deal stage of our 5 step plan. After launching your value creation plan, you need to monitor progress against the objectives and KPIs that were set out in the roadmap.
By tracking key metrics such as customer sentiment, brand recommendation scores, or product return rates, you can quickly identify any trends in performance. From there you can assess and add feedback to your value creation plan and update it as necessary. This ongoing review will ensure that you are making the most of your resources and switching up initiatives when they are no longer effective.
Get Started With Symanto
At Symanto, we can provide you with the insights and analytics to help shape your value creation plan. Our sophisticated AI platform will help you to quickly identify trends in customer sentiment and brand equity, allowing you to make data-driven decisions that are aligned with your overall objectives.
To find out more about how we can help you to unlock the true potential of your target company, get in touch or start your free 21-day trial of our text analytics software.
