1. Preparing for a Private Equity exit from Day 1
About every six months your board should discuss issues relating to a potential exit. This could include items such as the timing of an exit, who the potential buyers might be, what level of profits need to be achieved and which members of the management team will be involved post a sale?
You will need to build and maintain a strong, experienced and well-established management team. This means having succession plans for your key members of your management team. You want to have incumbents in position and operating for about a year before executing an exit.
You must keep your strategy up to date so that it continues to be compelling medium-term story for growth. This is something that your Board should be doing as a matter of course. Your strategy must continue to invest in growth as a means of sustaining the returns that are key for any (new) investors.
2. An effective portfolio company finance team
PE houses place significant importance on the experience, expertise and competence of your people, particularly your Chief Financial Officer and their team. Your finance function must be able to prepare and make full use of complex financial and management information. This is key to driving the kind of transformation and growth that Private Equity investors expect.
After completing your deal, the PE house will expect your CFO and finance team to focus on the future, closely watching earnings, profit and operational cash generation against what are likely to be ambitious forecasts and budgets. Are your people, systems and processes geared up to deliver for these demanding new stakeholders?
PE houses want portfolio companies to use the first 100 days to drive change management across the business. Your finance team will need to be ready to change how it works and become capable of supporting the wider business as it will look in the future.
A successful portfolio company CFO must provide the information and insights that drive business decisions and, ultimately, high growth. The right finance leader will be able to prepare and monitor detailed monthly profit and cash up to three years in advance. It will make sense to maintain the data room you built in preparation for taking investment This will help you make high quality decisions as you will have accurate data at your fingertips.
Your business needs your finance team to collate and analyse far more than profit and loss data. For instance, understanding the lifecycle and profitability of your clients or customers is invaluable in prioritising the right investments to drive growth. Your CFO/FD will also have a key role to play if you are planning to grow through acquisitions.
Your existing finance team may not have experience in preparing consolidated accounts, accounting for goodwill and intangible assets, complex financial instruments (like derivatives or hedging tools) or deferred tax liabilities. If that is the case, getting the advice and support of expert advisers can be a very effective investment. The right advisers will help your finance function avoid the common pitfalls and provide you with insights that keep your finance function ahead of the game.
You should ensure you have accounting systems that are able to scale up to cope with the anticipated new reporting requirements, a new group structure, potential new revenue streams and the likely increased demand for real-time, complex and forward-looking financial information. You may need to invest in a new or improved tech stack for your finance function.
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3. Management team succession
Your management team must be clear and aligned with the PE investor on who is in and who is out at the next deal.
Your management team is critical to the value of your business whether the next buyer is trade or another PE investor. If certain members of your management team are intending to leave, you must plan for that well ahead of the sale. Replacements need to be in situ and operating in the role for a minimum of 12 months before the next deal is likely to happen.
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4. Keep your strategy up to date
You started your PE journey with an exciting 3 to 4-year strategy. This strategy was the basis for securing your original Private Equity investment. You cannot afford to allow your strategy to become stale. Your next buyer, PE or trade, will need to see a compelling medium-term strategy for growth. You need a robust, up to date strategy that will deliver ongoing success to secure you a good price when the next deal happens. Your Board has a vital role to play in providing strategic direction and reviewing your strategy.
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5. Keep investing in growth
You should think carefully about how investment supports your ongoing growth and success.
There can be a temptation to reduce investment in order to maximise profit and cash pre-sale. This approach will come back to bite you and shareholders. Buyers will pay a high profit multiple when they believe the business can continue on a growth trajectory. This will not be credible if you have not invested in areas such as headcount or systems.
Investments will need to show a reasonably timely return or yield. No buyer will be prepared to factor these long term and as yet unquantifiable benefits into the price.
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6. Hold dynamic and effective Board meetings
There is a temptation to treat Board meetings as little more than a mechanism for reporting to your investor(s). Used effectively, Board meetings are a fantastic opportunity to horizon scan, solve difficult issues and revisit strategy.
The ideal board pack will highlight the challenges being faced by the business, how they could impact the growth plan and ideas on how they could be overcome. Additionally, each report should draw attention to new opportunities for growth and how these might be exploited.
The agenda for Board meetings should always reflect what is happening in the business and the goal is to develop a collaborative approach that harnesses the experience and insights of all Board members including your non-executive Directors.
Content adapted from BDO UK.