When private equity firms acquire companies, they often look for quick ways to “create value.” That can mean a lot of things: upgrading systems, optimizing routes, tightening processes, improving reporting. Those kinds of changes can make a business more efficient and profitable, which will increase its valuation.
Great for those PEs – but if current owners made these kinds of changes, they would get to enjoy the upside they bring themselves.
So, why don’t they?
An Opportunity Missed
I’ve seen it time and again: owners know their systems are outdated, their reporting isn’t as strong as it could be, or their operations aren’t as efficient as they should be, but because they’re focused on day-to-day demands, they put off making improvements. And then there’s Cousin Fred, who tells funny jokes and is a great guy, but really not pulling his weight in customer service. Too often, owners don’t hold the Cousin Fred in their organization accountable, and the rest of the staff notices, dragging down overall performance..
This is a huge mistake, because many of these improvements are entirely within the reach of the existing owner. If they are willing to make the required investments (and have some direct conversations with poor performers), they’ll be the ones to capture the gains – and ultimately enjoy the increase in enterprise value.
While it definitely takes some discipline and foresight, here are things that many current business owners might be able to improve about their business to reap the rewards while they’re still in charge:
- Analyze your customers. Rank your customers in order of 1) revenue and 2) gross margin. First, review the revenue ranking. Are you too dependent on one or more customers? Take steps to diversify. Make a game plan now to minimize the impact in case you were to lose one of them suddenly. Take steps to diversify by expanding sales efforts and expanding to new regions or products/services. Next, look at the list of customers ranked by margin. Any low-margin customers stick out? Why are some customers harder to serve than others? Increase their prices, change their service configuration, or let them go to a competitor. I bet your employees will thank you.
- Upgrade systems. If your operations rely on manual or outdated processes, modernizing them will improve the company’s ability to grow profitably with increased margins.
- Address neglected efficiencies. Route optimization, vendor negotiations, or streamlined workflows can unlock meaningful savings that flow straight to your bottom line.
- Strengthen reporting and controls. Reliable financial and operational data help you truly understand sources of profitability, and can surface issues that need to be resolved.
Why This Matters, One More Time
If you implement improvements before selling, you’re not just boosting performance – you’re increasing the multiple buyers will pay in the event you do decide to sell. In the meantime, you’ll be building a more sustainable and valuable company, generating more profits, and managing risks. And you keep that value.
In other words: don’t wait for a private equity firm to “fix” your business. Do it yourself, and reap the rewards. Be proactive… your future self will thank you.