demand side that make PE ownership attractive for those that manage companies. One such issue may surprise: increased control over one’s fate. (Location 106)
PE ownership can give companies the freedom to strike a balance between entrepreneurship on the one hand and financial discipline on the other. (Location 107)
But less has been written on those pay-for-performance plans that really do drive value in the PE context, or the more efficient board structure that helps a company take action swiftly and adds real value to a management team. (Location 113)
By following a half-dozen deceptively simple rules, the leading players in the PE community create value to a degree that many traditional companies do not—or at least have not, to date. (Location 128)
To improve profits and stock price, you need to make strategic choices with a clear picture of the full potential of your company in mind. (Location 155)
“Strategic due diligence” is the way to set the number, and growing your cash flow by pursuing a few core initiatives derived from this due diligence is the way to get (Location 159)
He then mapped out four “pillars” of value creation to transform his company from one focused on agro-business into one vested in research and development–led nutrition. These pillars—operational performance improvement; innovating and renovating the product portfolio; broadening distribution to reach customers “whenever, wherever, however”; and strengthening consumer communications—laid the foundation for change. (Location 165)
In most cases, as it turns out, the practical, actionable time frame for getting to full potential is three to five years: in other words, a private equity investor’s typical time frame. (Location 170)
What is a blueprint? Nothing more and nothing less than a strategic operating plan that takes those key initiatives and turns them into results. (Location 174)
But without driving organizational change around the key initiatives that will define success, many of these firms fall short of their goals. (Location 186)
Finally, accelerating performance means monitoring a few key metrics. (Location 190)
Your blueprint determines the key measures that are required to track the success of the chosen initiatives; the company then drives the entire corporate language and rewards system around those metrics. (Location 193)
All companies need great people throughout the management structure, and need them to think like owners. (Location 196)
Value-added boards help coach CEOs, provide real business input and make quick decisions on corporate requests. (Location 207)
Of course, board members should also be well steeped in the key initiatives and the blueprint, and use its language with management. (Location 209)
the best PE investors use boards not to manage the companies they own, but to reinforce the plans and help senior managers make the kinds of rapid and decisive moves that help foster success. (Location 211)
A higher debt-to-equity ratio helps strengthen managers’ focus, ensuring that they view cash as a scarce resource. (Location 217)
Scarce cash forces managers to aggressively manage working capital and allocate capital expenditures with great discipline. (Location 218)
Scarce cash also forces managers to work the rest of the balance sheet harder, using it as a dynamic tool for growth rather than a static indicator of performance. This means eliminating unproductive or underperforming capital, often by cutting pieces out of the business. It also may mean finding new ways to convert traditionally fixed assets into sources of financing. (Location 220)
repeatable within one activity and also across multiple activities. (Location 225)
Creating this culture requires both the right managers and the right management processes, as we have discussed. (Location 228)
As it turns out, when everybody owns the challenge of generating results, very few stones get left unturned, and value is created at all levels. (Location 233)
Today, the truly outstanding PE firms have replaced passive stewardship with a hands-on approach to building value in their portfolio companies. (Location 245)
creating operating value. Increasing the cash flow (and hence the value) of acquired companies is the process that the best PE firms are vigorously pursuing to keep generating attractive returns. (Location 252)
generally three to five years out, based on their due diligence findings, their reading of the full potential of the business and the planned financial structure. (Location 269)
The only compelling reason to pay more than the next bidder is the discovery that the microeconomics of the business can be better than conventional wisdom would imply. (Location 273)
So even if they know something about the company or industry at hand, they ask endless questions. (Advance knowledge can certainly lead to sharper questions at the outset, but there is always plenty of homework still to be done.) (Location 279)
These books are compiled mainly based on market research reports and analysts’ reports, which in turn are largely informed by off-the-shelf data. (Location 282)
They and their advisers drill deeply into the key drivers of demand and how they might behave in the future. (Location 287)
They approach suppliers the same way, looking at costs. They always analyze the competition (where possible, they interview competitors) (Location 288)
They are looking to determine what the full potential of the business is and what it could be worth in three to five years. This becomes their target equity value. At the same time, they are looking to identify the few key initiatives that should be emphasized to reach that full potential. (Location 291)
But smart PE owners, too, must think about sustainability. Because they will be selling the business to another buyer at some point, they need to ensure that the company they have invested in has a sustainable wealth creation platform. (Location 302)
In fact, the nice thing about PE firms cashing out is that it shows us how they did in a very tangible way. (Location 311)
For example, before the sale, Sealy’s management team had mapped out a plan to increase revenues by its volume of mid-priced mattresses. (Location 335)
We argue that corporations can benefit from a rigorous, PE-style process of internal due diligence, aimed at building an objective fact base about the company and at discovering its full potential. (Location 347)
Which handful of key initiatives, either undertaken from scratch or reinvigorated, will have enormous impact three to five years down the road? (Location 351)
We would go as far as observing that many corporate management teams know far less about the environment in which they operate than they think they do. (Location 354)
You must interview customers to understand how they make purchase decisions and how your key products or services stack up against those of the competition. (Location 358)
First, determine what your company could be worth three to five years down the road, and make it the overarching goal of your management team. Second, identify (Location 397)
Along the way, make sure that you and your helpers focus on the actionable. Remember: you are zeroing in on the three to five initiatives. (Location 411)
Who is excited about this process, and who is not? The status quo is immensely powerful, in most organizations. You will need to find strong allies who can help you through the longer-term process of creating value. (Location 413)
A blueprint is a strategic operating plan that lays out in pragmatic detail how an organization will successfully complete its initiatives and thereby achieve full potential. (Location 441)
The PE’s blueprint is only about action. It is about executing on the initiatives and how one dollar becomes several dollars within a specific time period. (Location 447)
One of Sealy’s key initiatives involved the redesign of its core mattress, based on a common platform, to drive growth, improve manufacturability, and reduce costs. (Location 448)
You need to be committed to your short list of key initiatives and to designing action-oriented road maps to implement them. (Location 458)
Then bring your senior management team together for an intensive, inclusive planning process in the figurative “windowless room”—for however long it takes. (Location 459)
Ask: what resources (money and people) will be required, and where will they come from? (Location 461)
to transform Korea First into a competitive retail bank. According to due diligence, getting there would take three critical initiatives: (Location 473)
Rather than divert resources to rebuilding branches from scratch, Newbridge worked with managers and redesigned the existing infrastructure. The team consolidated corporate business into a handful of large-scale branches. (Location 480)
For the second initiative, the new owners assigned a high-level executive team—supported by outside technical experts—to spearhead a change management program to consolidate loan processing, credit collection, and trade finance into two new customer service centers. (Location 484)
Finally, the blueprint took into account the need to build the right organization with the right salespeople to support the full-potential plan. (Location 488)
Plan on budgeting between two and six months for the blueprint process, on average, with an eye toward launching your first initiative within the first one hundred days. (Location 505)
They partner with management and help to identify the levels within the company where help is likely to be needed, and then they make sure that help can be found at that level. (Location 537)
The best PE firms foster senior management accountability. They do so in a number of ways, including insisting on executive sponsorship of individual initiatives. (Location 543)
PE buyers get paid when their bets pay off. They therefore keep a finger on the pulse of each portfolio company, seeking reassurance that things are going according to the plan, that the timetable can be met, and that the payoff will be there. (Location 560)
Rather than waiting to find out if the map (i.e., the blueprint) got them to the right place, activist investors use their onboard navigational systems constantly to make sure that they are headed in the right direction. (Location 564)
Measuring “profit per customer,” for example, looks backward. (Location 566)
Similarly, a measure of “declining sales” certainly points to a problem, but “revenue churn”—specifically, how many customers canceled contracts—tells management where to intervene. (Location 567)
PE firms watch cash more closely than earnings, knowing that cash remains a true barometer of financial performance, as earnings are subject to distortion. (Location 571)
For example, a PE firm with a portfolio company involved in wine making used cash flow and its cashconversion cycle, not return on assets or economic value added. (Location 574)
Managers in the best PE firms are careful to avoid imposing one set of measures across their entire portfolios, preferring to tailor measures to each business in the portfolio. (Location 581)
“You have to use performance measures that make sense for the business unit itself, rather than some preconceived notion from the corporate center.” (Location 582)
The blueprint set concrete revenue and profit growth targets for each of a dozen clusters of high-priority customers, ranked by potential value. (Location 593)
in which sales teams set priorities by determining advertisers’ current and potential value to the company. (Location 596)
management ratcheted up the number of accounts each sales rep served, and established guidelines for the number of calls or visits needed to close a sale. (Location 597)
Additionally, the measurement of performance via quantitative metrics (such as return on investment, or ROI) gave the sales force a new communication tool with their clients. (Location 601)
They made transparent for the first time how much revenue per customer each dollar invested in the sales effort yielded. (Location 604)
he also didn’t have the talent needed in HR to hire the missing managers! (Location 612)
what is needed to make the agreed-on blueprint real. (Location 613)
We often help companies think through what we call a “RAPID” scenario for decision making: in other words, just who is responsible for recommending an action (the R), agreeing (A), providing input (I), deciding (D), and ultimately performing (P), or executing against the decision. (Location 617)
Instead, look for data that will help you understand whether a specific initiative is succeeding according to the most relevant metrics. Is that data cash based, market based, competition based, or operationally based? (Location 624)
The ultimate measure would be organic growth, aimed at 5 to 6 percent per year with ever-improving margins. (Location 630)
office. He had been handed the keys to a company that was essentially insolvent. In fact, the company had earned its cost of capital just once in the previous thirteen years and had borrowed money from banks to continue paying a dividend! (Location 634)
The simple screen to put all such bonuses through is whether the additional compensation is directly linked to an outcome that was within the individual’s control. (Location 655)
PE players are absolutely unbending in their insistence on performance. (Location 683)
It’s just that their three-tofive-year time horizon doesn’t allow for very many misfires. They are systematic about thinking through what they need, what they’ve got, and where they need to fill the breach. (Location 684)
They act quickly to replace senior managers who fail to deliver or who are judged inadequate to the challenge. (Location 686)
They rigorously screen for an “at cause” attitude, which is generally seen as being as important as a strong skill set and track record. (Location 688)
are hungry for success, are willing to put their own financial upside at risk, and relish the challenge of transforming a company. (Location 689)
In these circumstances, the PE firm looks to partner with the CEO. (Location 692)
the acquirers look for someone who is a proven team builder, understands the importance of building value quickly, and has demonstrated the ability to hit ambitious targets. (Location 698)
After appointing Bob Nardelli—with his proven track record for “hard driving” but little automotive experience—as CEO at Chrysler, Cerberus lost no time hiring proven automotive experts to support Nardelli. (Location 700)
The most important way that PE firms recruit senior talent is to give them an equity position in their company that grows when targets are hit over the life of the investment. (Location 705)
Obviously, this can amount to a significant payout—far more important than salaries and bonuses combined. (Location 708)
Rewards remain closely tied to performance. (Location 710)
(This is part of the PE firm’s due diligence: how much talent is resident in the organization?) (Location 712)
The company’s new blueprint may involve a departure from standard operating procedures. (Location 714)
PE firms, too, find ways to hold on to talent—even when that talent gets moved out of an acquired company. (Location 715)
into the PE firm or by appointing them to lead or otherwise help newly acquired portfolio companies. (Location 716)
In some cases, getting transplanted into an entirely new industry is enough to rekindle the thrill of the hunt in a senior manager. (Location 718)
Perseus brought in Jack Boys, who previously had transformed The North Face into an outdoor-gear phenomenon. (Location 722)
Obviously, Nike decided that Boys deserved a lot of the credit for the turnaround: he was persuaded to stay on as CEO of Converse after the acquisition. (Location 726)
the PE owner is also attending to the composition and contributions of the company’s board. (Location 731)
Almost without exception, the best PE firms look to assemble what might be called a value-added board. (Location 732)
They are active, talented participants. (Location 734)
Second, and as an outgrowth of the first, they permit efficiency in the company’s operations and governance. (Location 734)
Most likely, the board will see its job as determining whether or not this proposed investment fits with the full-potential thesis and the blueprint. (Location 736)
Nor does the discussion stop at the board table. In most PE-owned company settings, the CEO is in a continuing dialogue with members of the board—again, not for political reasons, but to obtain substantive, action-oriented guidance. Very little of the CEO’s time is spent “bringing board members around”; most of it is spent drawing on their expertise. (Location 738)
there may also be a larger pool of expert advisers available to the CEO of a portfolio company. (Location 741)
It helps enormously, of course, that the PE firm’s seats on the board generally control something like more than half of the voting stock. (Location 744)
When it comes to assessing your insiders, try hard to smoke out and examine your own implicit assumptions. (Location 747)
people would prefer to “hide in the herd.” In other words, the assumption is that they would prefer to be compensated on the basis of overall corporate performance rather than the performance of the unit over which they have bottom-line control. (Location 749)
a certain number of entrepreneurial types who want their individual success at implementing the full-potential thesis and blueprint to be reflected in their personal compensation scheme. (Location 751)
who are already on the payroll are part of the problem rather than the solution. (Location 754)
embrace that individual in whom the company has invested a great deal, who understands more about the current realities than any outsider could, (Location 755)
Talent, like investment, gravitates toward good risk/reward opportunities. But while investors have the luxury of allocating their funds across multiple asset classes and in funds with different risk/reward profiles, most of us can only do one job. (Location 759)
Get market data on the alternatives talented people have and make sure your compensation package is competitive. (Location 765)
How about your own example? Why did your board bet on you? If the answer includes your ability to inspire and motivate, this is the time to call on those skills. (Location 770)
To put it bluntly, you need to find people who are more interested in opportunities than guarantees. (Location 773)
But two years later, with costs cut and market share on the rise, free cash flow had doubled, and Wall Street was happy. It would not have been possible had Kilts not trained his board to think in the strategic middle term. (Location 801)
Many traditional corporations fund much of their capital expenditures out of cash or with equity. They set relatively low hurdles for their investments, on the theory that internally funded initiatives are “cheap.” (Location 824)
One critical component of this approach is to aggressively manage down working capital. This may sound like Finance 101, but in fact, in a private equity environment, managing down working capital can be an indispensable part of the larger value creation formula. (Location 833)
PE owners generally use EBITDA as a measure of cash flow. They then look carefully at below-the-line costs to understand the real cashgeneration potential of a business. Let’s assume that EBITDA is $125. (Location 836)
the total debt-service requirement (principal and interest), (Location 838)
working capital as a percent of sales times the planned annual sales growth, (Location 839)
capital expenditures needed to continue to run and grow the business. (Location 839)
In this example, therefore, the real cash creation is $35. Bear in mind that no picture of cash flow is static, but depends on changes in market forces, competitors and customers. (Location 844)
you can quickly see that only one of these can be actively managed in the near term: working capital requirements (debt is relatively fixed, and capital expenditure has both a maintenance and a “growth” component; we’ll address the growth component below). (Location 847)
example, if through better inventory management and receivables/payables management we can move our business from a working capital ratio of 30 percent of new sales to 20 percent of new sales, (Location 849)
Finally, active managers make the physical capital on the balance sheet work harder. (Location 856)
They eliminate unproductive capital by selling equipment or by closing facilities. (Location 858)
Punch was able to isolate the rents it earned on real estate (an important source of cash flow) and package them as real estate investment securities that could be sold to investors. (Location 866)
saving some £30 million in annual interest costs. (Location 868)
938 million, of which just $231 million was equity. Closing uncompetitive foundries and innovating leaner manufacturing methods freed up cash for acquisitions, which collectively helped boost revenue from $865 million in 2001 to $1 billion in 2004. (Location 872)
keeping in mind the cash a company must have on hand for various business needs, including potential acquisitions. (Location 877)
but—as we’ve seen—only if you can manage your receivables, ride herd on your inventory, and otherwise manage your working capital, at the same time that you discipline your capital expenditures and work hard the fixed assets on your balance sheet. (Location 879)
That means—figuring 40 percent of $100 million—that you’re going to have to add $40 million of cash in working capital to finance that $100 million. What’s your cap ex?” (Location 886)
So unless your EBITDA is more than $100 million, you’re losing cash. In other words, you begin to make cash at over $100 million.” (Location 889)
especially as liquidity cycles are not predictable. We touched on that topic earlier. You are also likely to hear grumblings about how a greedy corporate center is unfairly squeezing the divisions. (Location 894)
Many companies go through what they deem rigorous capital budgeting exercises—but most of these are less rigorous than first meets the eye. (Location 897)
but if you look at the balance sheet and the cash flow, you find that many of these projects only start to pay off long after the forecasted date. Some projects never pay off. (Location 899)
If sales go up 10 percent, it’s assumed that the capital budget will also go up by something like 10 percent. It gets budgeted, and—not surprisingly—it gets spent. (Location 903)
You have to hold that second $300 million to the same return standards that you held the first $300 million to—otherwise, you are diluting your overall return. (Location 907)
“moving the needle”—that is, aiming for an even better overall performance by refreshing the strategic due diligence and, as a result, optimizing key initiatives. (Location 910)
make sure that the individual investments are closely monitored for performance. Make sure there is a closed feedback loop on each of them, so you get early readings about unrealistic assumptions that have sneaked into the plan. (Location 911)
One is to attract and keep outstanding managers to run our various operations. The other is capital allocation.” (Location 916)
For example, it has become common in many countries for airlines to improve balance sheet health by selling fleets and leasing back planes, and in the retail and hospitality sector to sell off sites and rent facilities. (Location 919)
Every dollar of equity is precious, and I have to maximize the return on that dollar. (Location 922)
making equity scarcer and more valuable. (Location 923)
The same is true with managing your working capital aggressively, managing the capital budgeting process in a highly disciplined way, and monetizing unproductive assets. (Location 923)
Fostering a results-oriented mind-set is about creating repeatable, sustainable processes in your company that will spur performance improvements again and again. (Location 940)
They put forward their theory of full potential, blueprint it, test it, monitor it, figure out what’s wrong, recalibrate, and move forward again. (Location 955)
They develop successful formulas that they (1) can repeat within a business and (2) can replicate outside the business. (Location 957)
Nike began as a “performance” basketball shoe company, and has transformed itself over time to a lifestyle company. (Location 959)
Expanding into new categories allows the company to forge new distribution channels and lock in suppliers. (Location 963)
that is, from heading up PE-owned firms to heading up traditional firms. The most common refrain we hear from these individuals, when they start figuring out their new environment, is that no one is accountable, but that’s not the full story. (Location 970)
the more likely it is that all accountability will “drift upward” toward the corner offices. (Location 972)
It is no surprise that these types of organizations tend to end up being “at effect” versus “at cause.” (Location 974)
The general managers of your business units have to feel that they are on the hook to deliver the results. (Location 977)
this type of accountability is less common in public companies, but often simply because not enough emphasis has been placed on the need to have (Location 979)
framework. I want you to spend 50 percent of your time doing what you are supposed to do, but spend 50 percent on telling me how you can create more value,’” (Location 981)
Your job as CEO is about leading. And when you lead an organization into change, you assume the significant burden of making sense out of it all for everyone else. (Location 989)
People always respond better to unplanned change—that is, crises and disasters—than they do to planned change. (Location 992)
why aspiring to create change for the better is the best plan for all. (Location 993)
Does your company have principles, aspirations, and nontangible goals? Of course it does. Do your people have personal goals and ideals? (Location 994)
has a far better chance of achieving those goals if they adopt change, in whatever language best suits your company and your own style. Collectively, (Location 996)
Many effective CEOs have become experts at mixing the latest technology with a human touch. (Location 1000)
For one, you can set a striking example for your team, as did the new CEO of an old-line industrial company whose stultified organization was killing the business. (Location 1008)
The CEO and his management team called meetings whenever they needed to talk about issues—and kept them short, rather than reverting to the old schedule of daylong meetings every six weeks. (Location 1010)
whereas his predecessor stuck largely to headquarters. Every one of these actions was a cue: things are going to be different around here. (Location 1012)
Smart PE firms are constantly moving the goalposts in the direction of higher performance (Location 1016)
Often, the diligence turns up exactly those kinds of opportunities. Remember, the goal here is not to make budget. The goal is to achieve “full potential.” These are very different aims! (Location 1019)
In the process, the company has hit its organic growth objective of 5 to 6 percent per year with improved margins. (Location 1041)
In late 2001, with the “growth by acquisition” phase largely over, CEO John Kelly held a meeting with all key senior managers to discuss the crucial issues facing the company, and kicked off an effort to redefine the business’s full potential and build a robust blueprint to achieve it. (Location 1055)