This article was co-authored by Aaron Collier, Director, Operations M&A, KPMG in Canada
Selling businesses is just as critical to a private equity (PE) fund's function as acquiring businesses, yet we find it rarely receives the same attention. PE funds often time asset sales based on market conditions with less focus on the timing of operational improvement initiatives. Taking early steps to maximize asset value in advance of a sale is often a missed opportunity.
However, it is understandable too. PE fund Operations Partners are busy putting out 'fires' in their current portfolio, with Investment Directors tracking down the next large acquisition. Both teams have little energy left to pursue actions that might boost an asset's sale price 12-18 months down the road. Moreover, PE funds rarely have people specifically assigned to deal value creation, but the tide is slowly changing.
Still, if a PE fund's ultimate goal is to earn high valuations for its assets, then it makes sense to deploy a robust exit readiness strategy that builds portfolio value in the period leading up to divestment. And that does not mean introducing transformation programs or cost-saving measures weeks or months before the deal ink dries. We know that buyers are highly skeptical of any cost down programs that launch within six months of a sale process and are not likely to factor them into their own valuations. Instead, they prefer to see change programs that have produced tangible value over a decent length of time, as this demonstrates financial and operational stability and a high level of performance predictability.
So what defines a 'decent length of time'? Of course, earlier is always better but that is not always practical. Ideally, implementing cost-saving ideas or transformation programs 18 months before an anticipated divestment allows the PE fund to record successes over a full 12 month cycle. This enables them to tie positive results of their earnings before interest, tax, depreciation and amortization (EBITDA) performance to specific change programs and support buyer scrutiny. After all, it is hard to dismiss a program that has been forecasted to generate a $30M EDITDA uplift when multiple results show it has already made $15M in progress.
In short, there is much to gain by taking action to maximize deal value as far out as 18 months from a sale. But what does that 'action' look like? It begins by looking for quick, high-impact opportunities to save costs or create value. Then, it is introducing new strategies or transformation programs that do not require a lot of capital and will not soak up management's time. A final (albeit crucial) step is to embed a governance structure to help ensure the programs are effectively managed, are receiving adequate resources, and that management is appropriately incentivized.
Tracking and documenting that success is also very important. Buyers will likely come to the table with an advisor who will critique and unpick your transformation program for any signs of weakness. Therefore, the more work you put into establishing and governing the programs, the more results you can show, and the stronger your case will be.
PE funds do spend a significant amount of time, effort, and due diligence sourcing new deals, but often far too little time defining upside potential leading up to a sale. There is a significant opportunity to become more deeply involved in the selling process and take pre-emptive actions that will swing value realization in your favour.
And when you are ready,
Let's do this.