Insight Article

Operational performance: Preparing for a private equity sale

Apr 29, 2019
Private equity

Operational performance is a key factor when private equity firms are looking at potential acquisitions. Business owners can address several areas within their organizations to assist in maximizing their company's value and make their company more attractive to private equity (PE) firms.

If you are thinking of preparing your business for external investment, consider prioritizing the following areas for improvement in advance of discussions with potential investors. In doing so, you will contribute to maximizing the marketability of your company and your proceeds on exit – especially if you are thinking of selling to a private equity firm.

  • System integration and technology: Are your current systems hindering your operations and/or revenue generating opportunities?
  • Process: Are your processes overly complicated with non-value added tasks where efficiency can drive greater productivity and enhance returns?
  • People: Do you have the right skills in your team to execute on the goals you have set out for your organization?

1. System integration and technology

One area that a private equity purchaser will be focused on is the quality and reliability of financial reporting to manage key performance indicators and to demonstrate increases in profit margin and efficiency over time to their limited partner (LP) investors.  As a result, it is imperative for business owners to develop or use the right tools and systems to demonstrate strength in operational and financial areas of the business.

While many small companies often have one main technology platform supported by additional applications, many mature companies begin to have multiple platforms and supporting applications, often as a result of growth through acquisition. As such, we often see situations where the acquired companies run different systems for core operations and financial reporting than the parent. Even though the parent company’s system may not be the best system, the new acquisition defaults to it simply because it is the system used by the parent company. In some cases, we have seen legacy systems in parent companies that are antiquated; in others, one that is almost entirely manual or bespoke to the parent company’s needs and not aligned to the new acquisition’s needs.

Business owners can prepare their business for investment by ensuring their proprietary systems work as intended and assist leadership with the key performance indicators to grow their business. Applicable software modules should be turned on and used. Data should be made as accessible as possible to senior leadership and analytics team members. Owners should determine if the systems and applications in-house are being used effectively and whether the ideal technical skills exist in-house to support them. If this is not the case, owners can develop plans to improve core systems and applications or fill skills gaps, prior to going to market in order to de-risk the information gathering process and potential valuation. Transparency combined with a solid action plan is a great way to start a new investor relationship off on the right foot.    

2. Process

A private equity firm will look for process efficiency in the delivery and execution of goods and services when looking at new acquisitions. Efficiency will lead to lower operational costs and resource costs, and ensure efficient use of capital. Process efficiencies are often a decision factor for private equity firms, as they look to allocate employees to value-added tasks and increase performance of their portfolio company as a whole. It is a common misconception that process efficiencies are focused only on lowering headcount.

Many small businesses start out with simple processes but as they grow and expand their teams or adopt systems, these processes risk becoming convoluted. Efficient processes lead to value creation—resources focus on complete value-added tasks and less time is spent on re-work, administration or back-office problem solving. A simple approach to help operations run smoothly and efficiently is standardization. For example, invoicing and billing processes may not be standardized within an organization, which can lead to an increase in wait times between process steps or too many steps in a process altogether. In many cases, business owners may be surprised to learn that there is a significant reduction of revenue associated with these inefficiencies.

There are a few things business owners can do to diagnose problems in the processes they have in place. An example of a helpful activity is a current state analysis that defines pain points in a particular process area. This type of analysis helps businesses determine the gaps or issues in their processes that are hindering them from achieving the desired company vision.

3. People

One of the most important considerations for business owners looking for private equity investment is the strength of their human capital and how knowledgeable they are about optimizing opportunities, processes and cash flow within the organization.  Most PE firms will decide to invest in a great management team in a reasonable business over a reasonable management team in a great business.

From a private equity perspective, a focus on financial execution is important because cash flow management directly impacts EBITDA and an organization’s ability to invest in research and development and expansion capital expenditures. Improving financial processes can augment payment collection from customers and shorten payment windows to suppliers. Private equity firms will notice these potential benefits during a due diligence process, which will inspire confidence in management. Greater clarity in financials will help businesses facilitate negotiations, ensure no surprises in due diligence and potentially lead to an increase the value of their organization during investor discussions.

Being able to show private equity firms your financial strength, however, goes beyond organizing income statements and tax statement. In our experience, companies may be able to pull together required information for external parties, but it may be a painful exercise. Showing private equity firms your financial strength means determining whether resources within finance and accounting have the right skills to execute good financial processes as well as the capability to strategize how to fix broken ones. Strong financial resources should be flexible in adopting industry best practices and technology that help the organization execute financial processes efficiently and effectively.  With private equity ownership often comes a significant growth strategy and ensuring your financial resources have the capability to expand with the organization will be key.

Business owners can begin to understand financial resource strength by defining the financial pain points they are experiencing today and conducting a skills assessment for the financial resources they have. Significant gaps in business needs and current resources can be remedied through training plans, consulting services or hiring an interim resource such as a CFO or controller to bring dedicated expertise to the leadership team.


In preparing your business for external investment, pay close attention to the operational aspects of your organization. Specifically, business owners should give special attention to the use of integrated systems and technology, efficient processes and talented people. In doing so, business owners can better position themselves to start the sale or investment process to private equity firms with confidence and maximize their valuation and other objectives.

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