The New Standard of Buy-side Diligence: Embedding Value Creation

It's no surprise that value creation has become the primary driver of portfolio returns in private equity. With exits delayed, fundraising tight, and macro conditions still uncertain, any new deal must be initiated with a critical value creation (VC) lens for EBITDA expansion. What stands out is the increasing rigor applied during buy-side diligence to develop real conviction around an asset’s value creation potential.

Over the past 12 months, we’ve seen a clear shift: investors now demand a higher level of conviction on near term VC as part of the diligence process. Supporting over 300 transactions annually, Stax has a front-row seat for this shift. Buy-side diligence is now expected to validate not just the business, but the value creation plan (VCP) itself. 

At a recent PE conference, a managing deal partner of leading mega-cap sponsor summed it up well on a panel: “In this environment, we don’t invest to underwrite the company, we underwrite the plan.” It’s a clear signal that EBITDA improvement is now embedded in the deal model, borne from actionable and measurable value creation driven actions. This sponsor takes it a step further by partnering the lead deal and operating partners to each deal at inception, creating shared accountability and commitment for executing the VCP. 

Here are five key value levers that top-performing investors are scrutinizing from day one:

 1. Build a modern revenue engine to 10x pipeline within your ICP

To unlock year-one growth, the most powerful lever is expanding penetration within your core product offering. While management presentations are naturally bullish, true pipeline predictability requires laser-focused Ideal Customer Profile (ICP) mapping and targeting. Effective diligence should segment the ICP and map year one addressable potential for current and new logo penetration, often down to the account level.

 

The key to underwriting near-term core growth is having a clear view of the top potential accounts capable of driving the next 10%+ of revenue growth. With precise targeting in place, investments in sales coverage and marketing demand generation to increase the top the funnel becomes significantly less risky.

Related: Beyond the Sale: Why Exit Planning Starts on Day One

2. Unlock True Pricing Power Without Losing Market Share

Few VC plans are created without pricing as a key lever. Yet, the ability to raise prices while also driving share gain is far harder to underwrite, especially in late-stage diligence. The real marker of pricing upside is demonstrated pricing power. At Stax, with deep experience across hundreds of transactions each year, we test for the ability of market leaders to command price increases without triggering customer churn. 

For a recent leading industrial distributor, we uncovered such strong stickiness, driven by differentiated services and VMI programs, that customers were unlikely to switch unless savings exceeded 10 to 15% on major spend categories. This provided high conviction that moderate annual price increases posed minimal risk.

3. Beware the cross-sell fallacy 

I’ve seen many value creation plans rely on overly aggressive cross-sell assumptions that often fail to materialize. While cursory analysis may suggest significant share-of-wallet potential by increasing penetration across a company’s product suite, execution is far more complex. Successful cross-selling typically requires competitive displacement, profitably and enacted without price discounts as the primary incentive. For real cross-sell penetration to take hold, there must be a clear, incremental value to the customer that strengthens with each additional product purchased.



In SaaS, a typical growth scenario involves a land-and-expand approach, where additional modules are sold following initial implementation. A holistic value proposition to customers for multiple modules must include either a combination of integrated user benefits (e.g., streamlined workflows through a unified interface), or improved outcomes from the combination of the different modules (e.g., lower customer acquisition costs through combined sales and marketing efficiency tools). Absent real customer value, the ability for a company to cross-sell is limited to simple discount bundling, an approach that rarely proves sustainable over time.

4. Reducing Underperformance and Variability

A key opportunity for immediate post-deal value creation lies in addressing underperformance across specific business units, customer segments, products, or locations. While diligence typically focuses on the top 80%+ of what drives revenue, there is often untapped value in identifying pockets of addressable low performance. 

For a recent industrial services target, we found significant variability in revenue performance across 10% of their branches. Further analysis of local demand and competition suggested that much of this performance gap stemmed from controllable factors. Even if diligence doesn’t pinpoint every root cause, isolating execution-related underperformance, provides a clear, actionable path for improvement that can be pressure tested immediately post-close.

5. Capture white space for the core

Most diligence processes characterize white space or adjacency growth as mid-to-longer term value creation opportunities with limited impact in the first year of hold. However, exceptions occur when there’s untapped potential to drive penetration of existing products through new channels or strategic repositioning to target untapped customer segments. 

A recent example often cited is the “Stanley cup play” – not hockey, but a $500M+ growth surge for a well-known beverage container brand repositioned to appeal to fashion-forward female customers. Injecting new growth in core products through improved channel and repositioning is a less common source of immediate value creation, but potentially high impact for leading mature brands with high extension potential.

The increasing confluence of buy-side diligence and value creation planning has continued to shape target evaluation processes towards a deeper identification of immediate value creation levers that can build early momentum post deal. In today’s deal environment, where top assets continue to command high multiples, successful investments will be closely correlated to the realization of the initial value creation thesis.

At Stax, our teams work collaboratively with management to help guide value creation from post-deal to pre-acquisition. Managing Director, Vince Zosa, specializes in working with our clients on value creation strategies to maximize portfolio performance and create successful exits. To learn more about our expertise, visit www.stax.com or contact us directly.