It is an exciting, energising, daunting stage in the life of a tech firm. Attention from a Private Equity firm with an interest in either growth or buyout is validation of the vision, energy, leadership and passion a founder has poured into their business over years.
PE firms typically don’t look for companies that need rescuing. They seek good businesses and strong management teams full of hardened professionals that know their market and are skilled and savvy leaders who have brought their teams along on their journey, buoyed by the promise of their vision for what the company can achieve.
General Partners are also skilled, pragmatic and focused operators who know from experience (good and bad) what it takes to accelerate growth and turn a business into the best version of itself.
Too often, however the transition from an independent business characterised by fast, bureaucracy-free decision making into a structure high on scrutiny that demands discipline, transparency and of course, performance, can be difficult and unpredictable.
Multiple studies by Forbes, HBR and others quote the failure rate of company acquisitions at between 70% and 90%. “Failure” in this context means the failure to deliver the value that was written into the investment case supporting the acquisition.
So, what goes wrong?
In all but the very few mega-deals, a company acquisition doesn’t materially change the macro environment in which the business operates. It doesn’t change interest rates or unemployment levels, doesn’t change the remainder of the competitive landscape, nor does it change the size or growth dynamics of the target market.
The difficulty comes when all players are optimistically assessing the acquisition mechanics in the abstract and believe that necessary future changes will all be resolved with flexibility and goodwill.
Too often, however, that goodwill clashes with the immediate demands of changes to the processes, systems and people that have made the acquired business originally successful.
It is a natural question. If the business is good enough to be attractive to a PE acquirer, then why change anything? Don’t the new owners just risk breaking a successful business? Yes, but that assumes that the new owners just want business as usual, which is rarely the case.
The Acquirers have bought the business because they can see what the business can be, not just what it is and they are keen to apply capital and expertise, and to accept the risk of change to deliver the vision.
The reality that the approach that got the business this far won’t be what’s needed to take it further plays out in many areas, probably most visibly in the A-type haven of sales.
Such is the command that the founders have over their business, sales forecasting is often an intuitive affair, with the founders carrying the sales pipeline in their heads, trading opportunities off against each other for the current period and making judgments over what will close and what won’t that don’t need to be reported or explained to anyone else.
That all changes in an environment that demands rigour, detail and transparency and does not tolerate surprises. Suddenly sales forecasts are taken very seriously with detail to be produced to satisfy a whole community of new stakeholders. Where previously the sales forecast was used to help plan resources and make sure there is enough cash at the end of the month to make rent and payroll, it now takes on a whole new significance.
Planning for operating cash remains just as important as it ever was, but the sales forecast now has a life as critical data used to plan for new investment and to chart the progress of the investment against the investment case.
It’s one thing to forecast a missed quota if the forecast is accurate, and the reasons are well communicated. A miss is never welcome, of course, but it is a totally different level of unacceptable if the forecast is totally at odds with reality.
That kind of failure erodes confidence and invites even more urgent and detailed scrutiny, which is management attention and time that could be spent elsewhere.
Depending on the size of the company being acquired, Microsoft Excel has probably been the default system that sales reps use to track their opportunities, using the spreadsheet as their own source of truth and copying information into the CRM, if one exists.
One study by the University of Hawaii professor Ray Panko concludes that up to 88% of all excel spreadsheets surveyed contain formula errors, with 80% being classed as significant errors. Taken across a sales team with potentially inconsistent spreadsheets and any number of calculation errors, the need to move to a uniform CRM platform that standardises the valuation of opportunities and drives discipline in forecasting becomes critical.
Taken together, the three dimensions of new sales forecasting processes, a new CRM system to replace the much-loved spreadsheet and, of course, a whole new level of urgency and management scrutiny create an environment where a lot can go wrong.
How to avoid these pitfalls?
The most effective approach starts with recognising how much these changes will affect the sales team members who are, by nature, confident self-possessed types who are probably already wary of the motives of the new parent organisation.
The changes that the team will go through needs to be treated as a project. You need to develop a dedicated plan with specific milestones. A dedicated change leader needs to be appointed. They will set the expectations for all concerned, and importantly let everyone know that the change is finite. This focus respects the contribution of the sales team and encourages them to view the change as something they are participating in, rather than something that is happening to them.
This change management activity is involved and detailed and can be a distraction for the executive team who rightly need to remain focused on the main game of growth and profitability. Using specialists to help plan and manage these change projects helps to maintain focus and contain costs. These change projects need to be clearly time limited. This helps to underline the urgency of the new business requirements and to also signals to the sales team that once done, the expectation is that there will be a “new-normal” with no looking backwards.
The key outcome is to maintain sales momentum and return the team’s focus and energy to the principal task of selling.
The sales team is just one area that needs early and deliberate attention, though the principle applies to all teams that will be required to adopt new ways of working and be subject to a change of “business tempo” that comes with working in a Private Equity owned portfolio company.
When a four year hold of a portfolio company is treated more like a 48-month project to quadruple the value of the business, each month is a milestone which must be met. Distraction destroys value, by delaying critical business outcomes, extending cost duplication and delaying synergy savings. More concerning is the effect that lost focus has on team morale with the risk that there could be “regretted losses” of critical team members. As is always the case, the best staff are the most portable and the least concerned in taking their chances in the employment market.
Early planning and focused, cost limited management of key transition projects are fundamental to maintaining the investment case value.
These challenges are not new, and they are not insoluble. Solutions lie in early recognition, early planning and targeted investment in managing these critical changes.
The Euca Difference
Euca is a team of senior practitioners who have direct experience of managing acquisitions and divestments in trade and Private Equity environments.
We focus on planning, leading and executing the necessary changes needed to maintain value, and keep critical resources focused on the core tasks of delivering on growth.
We are a small, specialist team which sets us apart from Big Four style firms with a land and expand business model. We believe that value is maximised when the transition process and cost is finite.
Contact us at info@eucaconsulting.com to discuss how we can add value to your acquisition.