What business leaders can learn from Private Equity firms
Existing leadership teams can become too attached to decisions that were made in the past, particularly if the incumbent leaders were involved in making those decisions. If a Private Equity firm (or other external investor) were to take a financial stake in your company tomorrow, what changes do you think they would want to make?
You don’t have to wait for someone to invest in your company to experience the benefits of seeing your business from an “outside in” perspective.
Cash is king.
If a PE firm were to acquire your company, they often use debt financing to fund the purchase. This creates a real urgency to optimize the cashflows of your company to help repay the debt. To do this, they would aim to tightly manage your accounts receivables, streamline and optimize your inventories, and scrutinize all discretionary expenses.
Put yourself in their shoes. Imagine you have just invested in your business. Examine every expense item and categorize them into three buckets.
1. “Must have” (required to keep the lights on)
2. “Smart to have” (creates a future strategic advantage)
3. “Nice to have” (everything else).
The next step is to eliminate as many of “nice to have” expenses as you can.
Core vs. Non Core?
Optimizing cash is all very well, but building the long-term value of your company means going beyond financial engineering and cost cutting. In order for a PE firm to successfully exit their investment they need to convince future buyers that they have positioned your company for long-term growth and profitability.
It seems counter intuitive, but as management thought leader Peter Drucker said, “The first step in a growth policy is not to decide where and how to grow. It is to decide what to abandon. In order to grow, a business must have a systematic policy to get rid of the outgrown, the obsolete, the unproductive.”
This usually means analyzing your product lines, service offerings, and office locations to assess their future profitability and growth potential. Some activities might be “Core” to your business right now, but they may not be the right activities for you to be investing resources in going forward.
I often say to clients, “You must continually prune the rose bush to create beautiful blooms”. It takes real courage to make these strategic decisions, but when you do, it frees up resources to focus them on the right “Core Activities” that will drive your long-term success.
Get it done.
In the first one hundred days of ownership, PE firms have little appetite for socialization and consensus building. They feel a sense of urgency to implement the strategic changes they have identified.
Business leaders can learn a lot from the PE firm’s need for speed. Yes, getting consensus and alignment about these changes is ideal, but you can’t please everyone, and waiting too long to implement the necessary strategic changes can profoundly impact your company’s future outcomes.
Get right management team in place.
PE firms know that a strong management team is critical to business execution and the ultimately the success of their investment. Sometimes they invest in a company based on the strength of its management talent. Otherwise they will act swiftly to put the right management team in place.
Research has shown that middle managers are the key to successful business execution.
Getting the right front line managers in place is critical to success. You have two jobs. Either you are coaching and developing these managers, or you’re looking for their replacement.”
PE firms pay modest base salaries, but add incentives to align everyone’s interests so that the staff share in the upside. They also share in the downside. PE firms will reduce or even eliminate incentive payments if the company fails to achieve the agreed targets. Staff are often given real “skin in the game” in the form of equity in the company. Because this equity is essentially locked up until the PE firm sells your company, or lists it on the stock market, it aligns everyone’s long-term interests.
Make performance visible.
PE firms pay rigorous attention to a carefully chosen set of Key Performance Indicators (KPIs) that will drive the success of your business model. They use business management software to make this performance visible, and to keep the managers and their teams focused on the most important metrics and projects that will move the business forward. Radical transparency drives business results.
Take a few minutes today to imagine yourself in the shoes of an outside investor who is performing due diligence on your company with the intention of investing in you. What would they identify that needs to change about the activities your company is currently performing, or how it is currently managed?
If you would like to know or learn more about this article, or other articles, or about how to improve your business, then please:
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