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There is a significant gap between how M&A professionals value a sales pipeline and the actual value of the pipeline. This introduces a huge void where actions are not taken and prospects stall out in the pipeline due to a costly mindset deficiency.
The goal in this post is to bridge that gap and bring insight and action items to the surface so we can help you close more deals with an ever growing and thriving sales pipeline.
While most of the content in this post applies to sales in general – including buying, selling, fundraising, going public, debt restructuring, and other M&A offerings, for simplicity, I’ll be giving examples of sell-side M&A.
The growth of a sales pipeline is a leading indicator of future revenue (and income). While the M&A transaction lifecycle is unique, the fundamental principles underlying growth are not.
Growing sales is very much exactly like growing wealth.
It requires investing your resources with some level of risk, managing your portfolio, measuring performance, making routine optimizations, and strict adherence to consistent strategy and execution.
Filling your pipeline is not simply about closing a deal today. It’s about finding and connecting with myriad opportunities that you are then able to predictably and consistently close deals in the future.
In economic terms “Time Preference” is the key variable to solve for when maximizing long term growth. Too many professionals focus on “ready now” deals and miss out on the 97% of deals that are not yet “ready now”. Be patient, follow good process, systematically build and remain engaged with your pipeline for best results.
The big money is not in the buying and selling, but in the waiting.
Think about the most recent deals you’ve closed – when did you first meet the client? How long did each opportunity take to close?
Consider, every business owner will either:
- Sell using an intermediary,
- Sell themselves, or
- Go out of business.
There are no other options and your pipeline is the lifeline to your future growth just as your portfolio is the lifeline to your retirement.
The simple truth is, you need to be meeting and talking with more business owners – adding them into your pipeline – regardless of if they’re ready to sell. Additionally, you need to be managing that pipeline so opportunities are moving through it.
Not every deal is the same and most deals close on an unpredictable timeline. With a large enough sample size and a low time preference, we’ll see clear patterns emerge which can help us optimize our approach and increase effectiveness.
What is measured gets managed and what is managed gets done.
Let’s take a minute and look at what exactly is a sales pipeline and how we can measure it.
A “Sales Pipeline” is the fundamental structure and information system to represent the sales process. It’s helpful to give a visual model of the sales process and how prospects move through the journey to become clients.
There are 3 key attributes of a sales funnel:
- Input of Prospects
- Stages Prospects Journey Through
- Output as the key event upon successful conversation from prospect to customer
The Essential Sales Pipeline:
Every sales pipeline has one or more inputs. This is your marketing (M&A Deal Sourcing) and it’s finding prospects to bring into the pipeline. Of course you will have referrals, which are the best source of new opportunities. From there, we’d like to find a diverse set of traction channels for our marketing to bring in new leads.
These may be organic or paid, as well as inbound or outbound generated. See the Dealmakers Dose our CEO, Matt Currie, did on packing your M&A sales pipeline here. It has great information and insight to help you optimize the input of your pipeline.
Additionally, when focusing on your pipeline inputs, a power lever available is your targeting criteria and a well defined ideal prospect avatar. This can make your marketing exponentially more powerful. See what Matt has to say about that power lever here, in a Dealmakers Dose about M&A Deal Sourcing.
Even for generalists, effective marketing stems from a well defined set of success criteria, with one essential element being the ideal customer profile and/or target market.
You can think of various industries / target markets in the same terms as an investment portfolio. Diversification is a valuable component of a well balanced and performant portfolio. You don’t have to choose a single set of criteria to focus on forever, however it is helpful to focus on one or few at a time to increase results.
Managing the inputs is the first step in maximizing the value of a sales pipeline. Make sure we’re getting high quality prospects who are aware of you and your company. From there, intrigue them with learning more about your value proposition and exactly how you can help them.
The next property of a sales pipeline is the set of “Stages” that prospects are in and move between. This is valuable organization into groups of like deals together to help you manage and convert them better.
The pipeline stages are representative of your sales and integrated marketing efforts. It is at this stage where a prospect is aware of you, has engaged in some fashion, and you are in direct contact discussing the opportunity.
A very basic set of M&A sales pipeline stages may be:
- Lead in
- Call scheduled
- Exit, no timeline
- Exit, timeline established
- Proposal sent
- Follow-up scheduled
- Closed/won
One big idea, is that each subsequent stage has further refined and more thoroughly vetted and advanced deals than the previous. The further the stage in the pipeline, the fewer number of deals and increased chances of closing. As you prioritize your attention, the deals further along in the pipeline are ideal to focus on first. There are near infinite optimizations to make in this part of the pipeline, which we’ll cover in future posts, webinars, and Dealmakers Dose’s.
The further a prospect makes it through the pipeline, the higher the expected value of the opportunity and closer it is to converting to money for you.
How do we assign a value to this?
The simple equation:
- P = Pipeline Value
- n = total number of deals in your pipeline
- i = a specific deal
- EV = Enterprise Value of the specific deal
The Total Pipeline Value is equal to the sum of all Enterprise Values of deals in your pipeline.
This is massive! Let’s break this down a bit further.
I’ve created a basic calculator, which I’m happy to share with you – please ask for it here.
The green boxes are variables that users can adjust so the calculator can function according to different models and assumptions. By default, we use very conservative numbers which we frequently see vastly underperforming our clients actual results.
Let’s discuss the basic assumptions:
- New Prospects/mo = number of new prospects meeting your target criteria that enter your pipeline. Either scheduling a meeting, meeting in person at an event and exchanging contact info, someone opting in to an online lead magnet, a referral, etc..could be anything. We set the default assumption here to 8 – which is also how many opportunities we guarantee per month while you work with us at OutFlow.
- Hot Rate: This is the proportion of people who are ready now. We set this to 0.1. This assumes that over the course of 10 months of consistent marketing, you’ll get 1 hot prospect. A conservative estimate.
- Qualification Rate: The percentage of prospects who are qualified, interested, and you will follow-up with. 35% is a nice conservative estimate here.
- OutFlow Fee – To measure your ROI of working with us here, we’ve set a baseline of $1,995/mo which is a solid entry point with us here. Otherwise, this amount is your overall marketing spend.
- Deal Size: We set this at $2M for demonstration purposes
- Referral Rate: the number of qualified prospects who will provide you one referral. This is set to .1 of .35 of the prospects entering your pipeline..or, one referral for every 30ish qualified prospects.
- Close Rate: the rate you close qualified prospects, which we’ve conservatively set to 6.75%
- Commission: In case you’d like to calculate your revenue or income, this commission amount can be set here.
Each circumstance is different, however as thinking in aggregate helps us systemize, streamline, and optimize – we use these assumptions here to model the value of our sales pipeline and the expected value it can bring to your business.
Given these assumptions, let’s look at the following examples:
As you can see, the Pipeline potential grows incredibly fast as does the expected value of deals closed and commissions.
In a more short-form summary, see the results of steady, consistent pipeline development:
This is the first in a series of pipeline value content we’ll be sharing. In the future we’ll share more about optimizing inputs, optimizing the stages, considerations for measuring/tracking, and systems for continual optimization.
We’ll explore specific strategies and tactics regarding:
- Activities to move prospects between stages
- Measurement / KPI’s
- Systems
- Roles and Responsibilities
- Feedback loops
- Research and Development
Some considerations to leave you with here, Are you happy with your pipeline? Are you filling it? Are you managing it well?
Too often we see M&A professionals neglect their pipeline:
- Too many options, overwhelmed not knowing what to do
- Limiting belief that they are not a marketer or salesperson which results in avoidance of that aspect of your business
- Ineffective results and discouragement from future efforts
- Too busy doing deals
- Trust others who are selling tactics and not based on a fundamental strategy
- And more..
What happens when you’re not filling your pipeline?
- Someone else is finding these business owners
- Your deal flow dries up
- The cycle takes a very long time to catch up
- You miss out on exclusive, off-market deals
- You transact fewer deals
- You make less money
- Your impact on others is limited
There is a lot to discuss with filling and managing a pipeline, however the first step is with regard to mindset and giving the proper value and attention to optimizing what is likely the greatest asset in your business.
Let’s discuss more ways to help you find and close more deals!
