In a perfect world, private equity investors are able to sit back after purchasing a promising portfolio company and wait for the returns to roll in. You’re on top of the world! Investment Thesis: Accomplished.
Unfortunately, what often happens is that several months in, the new company’s performance is underwhelming. Profits have stalled or are declining, and investors are left scratching their heads wondering what went wrong.
Though there could be issues with processes, technology, or products, one of the most common issues we see with Middle Market portfolio companies is the people. When a new company is wrapped into your portfolio, it’s possible that current leadership doesn’t have the skills or expertise needed to guide step changes that will result in the significant growth you were hoping to see.
If this is the case, it might be necessary to bring in Operating Partners to work with or replace the existing leadership and create the changes necessary to make your purchase profitable.
Here are six signs your middle market portfolio company could benefit from leadership assistance.
1) Failure to hit financial targets.
Though there are a number of reasons your company isn’t hitting financial targets, if the problem continues for long enough, it means leadership doesn’t have the necessary skills or expertise needed to course-correct. If cost overruns are becoming the norm, earnings continue to slide, and leadership isn’t able to accurately predict future earnings and prospects, it’s probably a good sign the team needs some assistance.
2) Strategies aren’t being developed and shared from the top.
If sales, operations, pricing, or go-to-market strategies aren’t being fully formed or clearly articulated from the C-suite, your ship is rudderless. Also common is the middle market business owner who relies on the “same old” strategies, marketing initiatives, pricing structures, and ways of conducting business that no longer resonate with the modern customer. If strategizing and setting consistent processes isn’t a strong suit of your leadership team, it’s wise to bring in someone who can help with that piece of the puzzle.
3) Competitive losses spark no response.
As the industry and competitor landscape shifts and your market share dwindles, leadership should conduct a top-down review and look for new ways to take back a share of the market. If leadership can’t find new ways to keep up with the changing industry or fails to take any action at all, it’s up to you to bring in someone who can modernize processes, products, and technology to stay relevant.
4) Exodus of top talent.
After acquiring a new company, it’s not unusual to lose all or a portion of the C-suite in the transition. But if the C-suite has become a revolving door, the rest of the staff and managers may have little confidence in the future of the company and find reasons to leave themselves. It’s essential to assemble a leadership team with a clear vision and the ability to see it through to keep the rest of your staff onboard.
5) Focusing on the wrong customers and products.
Successful businesses follow the 80/20 rule, focusing on the 20 percent of customers and products that deliver 80 percent of their profits. However, in order to know where to spend resources, a business needs to know who their most profitable clients are and which products are the biggest contributors to their bottom line. Without accurate client- and SKU-level profitability reporting, leadership ends up wasting resources on less profitable groups and adding new clients and products without looking at their long-term potential.
6) You’re planning to sell and need to increase company value.
Whether you’re a private equity investor or business owner, if you plan to sell your company within the next few years and you want to increase its value, new leadership can help you do that. Though it may be a challenge to hire a new CEO that can turn a company around only to leave when it sells, enlisting the help of knowledgeable consultants is a great way to drive changes that can increase the value of your company when you’re preparing for sale.
The Operating Partners at FortéOne have deep industry knowledge and more than 20 years’ experience building successful businesses. They know how to make smart, tough, and timely decisions and work with your team to shrewdly analyze what’s working and what’s holding you back.
We place the right people with the right experience in your organization to generate results. Our Operating Partners assume (often multiple) leadership positions within the C-suite—including the CEO—and rapidly define and implement the changes necessary for both immediate impact and long-term success.
Using a shared-risk model, we can tie a significant amount of our compensation to meeting and exceeding agreed-upon measures, so you can rest assured your dollars are put to good use.