Private equity firms have a simple recipe for making money: They identify companies they believe are undervalued, improve those companies, then sell them for far more than they paid to buy them in the first place.
Knowing how private equity firms work can serve as a roadmap for any company looking to improve operations and maximize value.
Start with these 3 things PE firms do following an acquisition in the lower middle market ($2-$15 million in EBITDA) to improve your own bottom line, whether you plan to continue operating your business or want to ready the company for a future PE investment.
1. Identify Talent Gaps
This is especially true at mid-level companies where entrepreneurs or families have built a great business over time, says Douglas Song, co-founder of Prodos Capital Management, which invests in low and middle-market companies.
“There’s always a way to think creatively and unlock value in any lower middle market company.” Often, that is because the firms are lacking in certain areas where partnering with additional resources will help them take the business to the next level.
Song says one of the critical areas of focus is the finance and accounting function. Intuitively this makes sense – financial expertise that was sufficient for a founder or family-owned company might not present the breadth and depth of experience that a professional investor would require.
Brent Paris, a partner with Dubin Clark & Company, agrees.
“We typically hire a CFO to complement existing management teams, as most companies that we recapitalize do not have one in place,” he says. “The small companies we’re adding to our portfolio require someone with experience operating in a leveraged environment, including dealing with bank covenants and mezzanine covenants.”
Most business founders have not worked with private equity investors before, so they’re unfamiliar with reporting requirements, including regular management meetings, monthly financial packages, and quarterly board packages.
2. Focus on Sales and Marketing
“Typically, the entrepreneur is the most important salesperson at the company. Sometimes they have a sales force, sometimes not, but almost always the marketing and sales areas are not built out to get into the next level,” Song says.
Paris agrees. In nearly all of Dubin Clark’s deals, the PE firm brings in a sales executive to meet new and higher sales expectations or to fill a skills gap.
Business owners are likely to believe they have effectively gone after their market, doing everything possible to build a great company. But PE firms looking for fast growth want an experienced sales and marketing executive who can spot new opportunities the legacy management team may have missed.
3. Focus on Strategic Planning and Budgeting
It’s easy to let long-term planning take a back seat to the pressures of meeting today’s challenges. But PE firms focus on the future and building the business. A strong strategic plan is their roadmap to success.
The Easiest Way Companies Can Capitalize from Understanding How Private Equity Firms Work
Entrepreneurs and family business owners who want to model business growth on the way PE firms work don’t have to commit to hiring a full-time CFO or other C-suite talent.
It’s easy to dip a toe in the water by contracting with, for example, a part-time or fractional CFO with experience building solid financial reporting. There is no need to commit to a full-time hire with all of the promises, expenses, and commitment required. You’re not taking on new employees, you do not have the burden of benefits and severance or long-term contracts. Fractional executives are completely focused on results and either side can end the contract at any time.
If part-time isn’t enough, consider an interim executive with the skills you need on your team. An Interim Chief Marketing Officer or Chief Sales Officer, for example, can help you tell a compelling story to customers and the marketplace. An Interim Chief Operating Officer is a real-time executive change agent laser-focused on aligning resources, people, and assets to get the mission accomplished.
And interims have the same benefit as fractional executives — an executive focused on results without the long-term commitment.
Not sure what you need? Contact InterimExecs to learn more about how an interim, part-time, or fractional executive from InterimExecs RED Team can help solve your biggest challenges, opportunities, and leadership gaps.