Improve exit multiple in B2B using Digital

Improve exit multiple of B2B companies

Private Equity’s digital multiplier for B2B

Digital capabilities can deliver a higher exit multiple even for a B2B portfolio company

With PE deal multiples at record highs, the pressure on a portfolio company to outperform its market and secure a good exit multiple is greater than ever before. PE firms realise the potential of Digital to generate this out-performance, and many firms are including digital due diligence in their investment thesis. However, most of this focus on ‘Digital’ continues to be for B2C portfolio companies.

The good news is that an out-performance using digital is possible even in B2B companies. For example, B2B digital leaders generated 5x revenue growth, 8x EBIT growth and 1.8x higher TRS over 5 years vs. their peers, as per a McKinsey & Co. study

PE firms have unique considerations when choosing digital initiatives for its B2B portfolio companies

A B2B company chooses its digital initiatives based on its: 

i) Aspiration and Strategy e.g., EBITDA target, organic vs. inorganic growth, market entry, etc.

ii) Context e.g., macro market trends, competitor actions, its own digital maturity, etc.

ii) RoI of the potential digital initiatives 

However, for a PE owner, two additional factors are relevant:

iv) Number of concurrent initiatives

v) Time to impact 

A PE firm can realistically pursue only a handful of digital initiatives in a portfolio company. Else they risk spreading their limited transformation resources too thinly.  A PE firm also needs to choose an initiative that can generate impact within the holding period. The latter can often be the biggest barrier to digital investment.

Digital Pricing initiative can be a go-to lever to improve B2B exit multiple 

B2B companies usually use digital to improve operational efficiencies but using digital to innovate around customer experience and commercial practices can truly move the needle. Among the commercial initiatives, a digital pricing initiative can be a go-to value creation lever to improve exit multiple because of its quick and high EBITDA impact. Digital pricing initiatives can generate and sustain a 250-500 bps margin increase with a visible impact from as early as 3 to 6 months. 

You may ask, “What is new with a digital pricing initiative? Don’t B2B companies usually have an annual price improvement program?” While most B2B companies usually have some price improvement program, most design and drive their price initiatives top-down. As a result, these companies only partially achieve their EBITDA goals. A 2019 Global Pricing Study found that companies realise <30% of the planned price increase. 

On the other hand, a digital-led pricing initiative is different and more successful as it: 

i) Analyses granular and multi-dimensional data from sales invoices, customers and market 

ii) Identifies customer-specific actions to address unjustified price variance or margin leakage

iii) Enables value-based pricing to improve margins from specific customers and products

iv) Pinpoints sales reps that need more training and coaching to negotiate the right price

Should a Digital Pricing initiative be a priority at your B2B portfolio company?

Even if you have already planned a pricing program at your portfolio company, we would recommend reviewing our simple self-assessment to discover the pricing opportunity. A “No” or “Not sure” response to >2 questions will indicate that ‘Digital Pricing’ should be in your initiatives shortlist. 

Next, you will have to move beyond the traditional excel based top-down analyses and analyse the granular and multi-dimensional data on sales invoice, customers and market. Modern digital tools enable you to conduct such granular analyses and estimate the true EBITDA upside and ROI over the holding period. This upside and ROI insight can help you to confirm if a Digital Pricing initiative can improve exit multiple and whether it should be a priority initiative at your B2B portfolio company.

If you have any questions on the self-assessment or, if you sense a pricing opportunity but need help to quantify it using modern digital tools, contact us at pricing@b2bgrowthconsulting.com

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About the authors:

 

Kedar Gharpure is the Director of B2B Growth Consulting Ltd. He has served business heads of several Fortune 250 and Private Equity owned B2B companies on growth strategy and commercial transformation.

 

Vidya Ranade is the founder of Decodexis, a company that provides bespoke analytics and consulting services to clients in marketing & sales, operations and R&D.

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