No one size fits all. The same goes for private equity firms and their approaches. Here’s a take from my experience and the way we structure our approach working with portfolio companies.
There are four pillars to consider –
(A) People,
(B) Future Growth,
(C) Governance and
(D) Investment Horizon and Exit
People – a comprehensive review of the personnel and especially of the Management Team is paramount to the successful venture. We review the headcount to make sure there are no overlaps and every individual, at least at the manager/senior level, is in the right place. At times, we have to make a hard decision and find a replacement if the company’s needs outgrown the individual’s potential. As harsh as it may sound, it’s the reality we have to deal with. Just like founders can be great entrepreneurs but fail more often than not as chief executives. Moreover, we prefer to institute an LTIP or long-term incentive plan with the executive management. We believe everyone at the senior management level should participate in the company’s growth and our exit at the end of the investment period. Lower ranks would typically be compensated based on the bonus and company’s annual EBITDA performance.
Future Growth – value creation starts before the acquisition is completed. This means there are clearly identifiable paths to growth. This could mean process improvement or giving a business more focus and developing a leading position in the marketplace, etc. The notion of buying good brands with broken operations is critical here. I like to say – partnering with great management teams that need direction and in some cases freedom to grow.
Governance – This one is very critical. Expect a bit of a heavy reporting structure and much faster month-end closes. If the accounting close is over 7 days, that’s not good. Expect comprehensive month-end reporting packages, weekly dashboards and regular meetings to go over the results. Technology aspect of performance improvement here is also at the top of the mind. Also, expect at least an annual several hour strategy session with a mid-year follow-up. Spend/cash outlay limits and timing will need to be approved above the threshold. Expect everyone to have annual goals that would trickle down to their respective teams.
Investment Horizon & Exit – This is inevitable. Expect this to happen sooner or later. We have investors, who expect a return on their capital. It’s as simple as that. It would be great to transition the business to a Family Office that would love to hold the business indefinitely, but even then, it’s least likely to happen. The one thing we are open and clear about is 4-6 year sales and EBITDA targets, and we have management participate in achieving and also enjoying the returns. We believe in aligning everyone’s interests with ours and performance expectations.
No one size fits all. The same goes for private equity partners.
I hope this short post helps business-owners considering partnering with private equity groups. One thing to remember is that no one size fits all. Learn about your future partners management preferences, operations involvement, governance and reporting structure and as well as incentive plans. Transparency is paramount here.
-A.G.
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