With a dramatic increase in the number of firms pursuing “exit readiness” strategies, today’s buyers are more selective, and, in many cases, the assets that must be marketed aren’t yet ready for prime time. As a result, it’s become more important than ever for private equity firms to set the agenda.
They must position the portfolio company on the company’s terms, rather than let the market define it. In many cases, this means not just focusing on where the company is today, but where it’s projected to be in coming years. This phenomenon is forcing firms to think smarter and harder about the approach they want to take.
Here are six best practices in preparing a company for a sale:
1. Develop a solid five year growth strategy based on the current business model, the real opportunity in the market, and the infrastructure of the company. Not many companies can do the blue ocean approach – create a whole new market and a whole new model – and it will be hard to position that when you are looking for a buyer. Ground your strategy in who you are, what you know, what the facts bear out.
2. Be solid in all business functions by answering the following questions:
a. Sales and marketing: How do they create value? Do your professionals have an understanding of your customer base? Is compensation sustainable as it is currently designed?
b. Operations: Lean, scalable, able to support the five year strategy?
c. Back office: Lean but properly staffed to support the business?
3. Mind the HR factor: Make sure that your talent base is strong across your organisation as they will drive the strategy and lead the growth plan over time.
4. Time it right:
a. If you have a skeleton in the closet, deal with it. If you find that you cannot deal with it or need help doing so, be transparent about that. It could be a deal killer, plain and simple.
b. If you have made changes to a process or business function, have at least six months running with this new structure to show it is sustainable.
5. Be proactive: Don’t rush into a data room because of pressure from an investment banker. Get your documentation in place well ahead of time, vet the process, move at a steady pace, not in a panic.
6. Designate the internal team to lead the sales process:
a. It shows the bench strength that you have to execute during the sale and beyond the sale (and goes back to buy-in from the top down on the strategy).
Another critical issue for firms to keep top of mind is risk mitigation, as now is not the time for bad news. If a portfolio company is underperforming, firms are dispatching additional management to address the issues. In a number of cases, firms have hired outside talent to take on these roles, parachuting in to assume interim management positions and shore up operations in a variety of areas. The bottom line is that even if a company hasn’t reached its full potential, it has to be fundamentally healthier than in the past when it tests the sale market.
Firms must also maintain the confidence of limited partners by posting wins, particularly if they’re embarking on new fundraising. As a result, the savviest firms are aggressively working to control their destinies by constructing tight stories for their companies from an operational, financial and strategic perspective – rather than face the prospect of seeking fund extensions from LPs or the near unthinkable: liquidating the fund.
The private equity industry is realising industry challenges very rapidly as market conditions are dictating new approaches to navigating the changing tides. This is a time for private equity firms to take a step back and re-evaluate processes; a time to implement new approaches.
Mike Tamulis, Markus Lahrkamp and Ryan Farrell are managing directors in the private equity services group of Alvarez & Marsal, a professional services firm.