The Number That Determines Whether Your Acquisition Was Worth Making

There is a calculation that every PE operating partner should be able to produce for every portfolio company, at any point in the hold period, but almost none can. It is not EBITDA. It is not revenue growth. It is not even return on invested capital, though that comes closer.

It is the total cost of getting the people decisions wrong.

Not the cost of payroll. Not the cost of the HR function. The cost of the leadership hires that failed, the restructuring programmes that took twice as long as planned, the key person departures that triggered client losses, and the management capability gaps that turned a twelve-month value creation initiative into a thirty-month slog. Added together, mapped against the hold period, and expressed as a proportion of the value that was supposed to be created, this number tells you more about the health of your investment than any operational KPI on the dashboard.

The reason nobody calculates it is not that it is difficult. It is that the answer is uncomfortable.

A Worked Example

Consider a mid-market acquisition at £15m enterprise value. The deal is funded with £6m of equity and £9m of debt. The value creation plan targets £22m enterprise value at exit in year four, driven by a combination of revenue growth, margin improvement, and operational efficiency. The plan assumes the right leadership team is in place from completion.

This is the assumption that deserves the most scrutiny and receives the least.

Let us model what happens when people decisions go wrong, using conservative estimates that anyone who has operated a PE-backed business will recognise as realistic.

Scenario: The wrong CFO stays too long.

The incumbent CFO was adequate for the pre-acquisition business but lacks the commercial finance capability the value creation plan requires. This is not identified during due diligence because the financial DD focused on the numbers, not the person producing them. The operating partner recognises the problem at month four. The decision to act is delayed until month eight because there is no structured assessment framework and the relationship is not yet bad enough to force the issue. The exit negotiation takes two months. Recruitment takes four months. The new CFO takes six months to reach full effectiveness.

Total elapsed time from completion to a fully effective CFO: twenty months.

Direct costs: settlement agreement for the departing CFO, £80,000 to £120,000 depending on tenure and negotiation. Recruitment fees, typically twenty-five to thirty percent of a £140,000 package, so £35,000 to £42,000. Management time spent on the process rather than on value creation, conservatively two months of operating partner time across the period.

Indirect costs: twenty months of sub-optimal financial leadership in a business that needs to hit specific milestones to achieve exit value. The value creation plan assumed quarterly board reporting at PE standard from month three. It assumed working capital improvements from month six. It assumed the financial narrative for exit preparation to begin developing from month thirty. None of these happened on schedule.

Quantifying the indirect cost precisely is impossible. Estimating it conservatively is not. If the twenty-month delay to effective CFO leadership costs the business six months of progress against the value creation plan, and if the plan targets £7m of enterprise value creation over four years, then six months of delay represents approximately £875,000 of value creation foregone. Not lost permanently, necessarily, but pushed to the right, compressed into a shorter window, and achieved with less certainty.

Scenario: Two key person departures in year one.

The value creation plan identified five individuals as critical to execution. No structured retention strategy was implemented beyond standard bonus arrangements. Two of the five leave within the first twelve months, one to a competitor and one because the post-acquisition culture did not match what they were told to expect.

Direct costs: replacement recruitment for two senior roles, £60,000 to £80,000. The period of reduced performance while replacements are found and onboarded, six to nine months per role.

Indirect costs: client relationships that were personally held by the departing individuals. Assume one of the two managed three key accounts representing £400,000 of annual revenue. Assume one of those accounts is lost entirely and the other two require significant re-engagement. Revenue impact in year one: £150,000 to £250,000. Knowledge and relationship capital lost: unquantifiable but real.

Scenario: The restructuring that should have taken three months takes nine.

The value creation plan includes a restructuring of the operations function. The plan assumed this would be complete within the first quarter. In practice, the HR infrastructure was not ready, the consultation process was not properly managed, two affected employees raised grievances, and one brought a tribunal claim. The restructuring eventually completes at month nine, at a cost that exceeded the original estimate by forty percent.

Direct excess costs: £60,000 to £100,000 in additional legal, HR, and management time. Indirect costs: six months of operational underperformance during the period of uncertainty and disruption.

Combined impact across all three scenarios.

Direct costs: £235,000 to £342,000. These are the costs that will appear somewhere in the management accounts, though they will be spread across multiple line items and multiple periods in a way that makes the aggregate invisible unless someone is specifically looking for it.

Indirect costs (value creation delay and revenue impact): conservatively £1,025,000 to £1,125,000. These costs will never appear in the management accounts. They will be experienced as a value creation plan that is behind schedule, attributed to market conditions and operational complexity, and absorbed into the general narrative of the hold period without ever being connected to the people decisions that caused them.

Total estimated cost of getting the people decisions wrong in this scenario: £1.26m to £1.47m. Against a £15m enterprise value acquisition with a £7m value creation target, that represents eighteen to twenty-one percent of the planned value creation, consumed by people decisions that were either not made, made too late, or made without adequate information.

The assumptions in this model are transparent and conservative. Anyone who has operated in the PE mid-market for more than two years will recognise that the real numbers are frequently worse.

Total estimated cost of getting the people decisions wrong: £1.26m to £1.47m — eighteen to twenty-one percent of the planned value creation, consumed by decisions that were either not made, made too late, or made without adequate information.

Why This Number Stays Hidden

The total cost of people decisions does not appear in any standard reporting framework because it is distributed across time, across cost categories, and across the attribution models that portfolio companies use to explain performance.

The CFO settlement is coded to exceptional items. The recruitment fees sit in professional services. The revenue impact from key person departures is attributed to market conditions. The restructuring overrun is explained by operational complexity. Each individual item is explicable in isolation. In aggregate, they represent a pattern that nobody is incentivised to identify because identifying it would require acknowledging that the people decisions were wrong.

This is not dishonesty. It is a structural feature of how PE-backed businesses report. The systems are designed to track financial performance against plan. They are not designed to track the cost of people decisions against the value those decisions were supposed to protect or create. Until they are, the number will remain hidden, and the same mistakes will be repeated in the next portfolio company with the same confidence that this time the team will be right.

The Prevention Arithmetic

Set the cost of a comprehensive people due diligence and integration planning workstream at £40,000 to £60,000. Add the cost of structured leadership assessment and a genuine retention strategy at £25,000 to £35,000. Add the cost of experienced HR support through the first twelve months to manage the restructuring properly, handle the exits cleanly, and ensure the employment infrastructure is fit for purpose. An HR MOT at completion provides the baseline, and ongoing HR consultancy support ensures the people dimension is managed with the same discipline as the financial dimension throughout the hold period.

Total investment in getting the people dimension right: £115,000 to £175,000 across the first year.

Set that against the £1.26m to £1.47m cost of getting it wrong, and the return on investment is somewhere between seven and thirteen to one.

This is not a difficult decision. It is a decision that is difficult to make only if you believe that people risk is somehow different from financial risk, legal risk, or operational risk, and that it can be managed through instinct rather than through structured, experienced, professional assessment.

The evidence from twenty years of PE mid-market transactions suggests, with considerable consistency, that it cannot.

The Uncomfortable Conclusion

Every PE firm has a rigorous process for assessing financial risk before and after a transaction. Most have an equally rigorous process for legal risk. Almost none have an equivalent process for people risk, despite the fact that people-related issues are the most common source of post-completion value destruction and the most common reason that value creation plans fall behind schedule.

The number that determines whether your acquisition was worth making is not the entry multiple. It is the cost of the people decisions you got wrong, set against the value those decisions were supposed to create. If you cannot produce that number for every portfolio company in your fund, you are managing the largest source of risk in your portfolio without data, without structure, and without the information you would need to do it differently next time.

That is not a people problem. It is an investment discipline problem. And it has a solution.

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If you want to understand the cost of people decisions in your portfolio, or if you are approaching a transaction and want to prevent these costs rather than absorb them, talk to us. Our private equity people consultancy and management consultancy teams work with PE firms on exactly this challenge.