Should Your Firm Use Private Equity Disciplines

It’s January 2016 as we think about this scenario for your firm: by January 2019 you have grown your firm’s valuation three and one half times its current valuation. How could you do this is just three years? One possibility is to use Private Equity disciplines.

nyc-fireworksThe purpose of this article is to give you the ammunition to decide if you want to take on PE disciplines before being approached by a PE firm to sell to them or maintain your ownership and grow your firm yourself. I will paraphrase from a great little book “Lessons From Private Equity Any Company Can Use” by Orit Gadiesh and Hugh MacArthur in addition to relaying my experience.

Private Equity Funds Transform Outdated Models

Private equity funds buy existing businesses and apply hard-lined tactics to revamp out-dated models. Usually after three to five years they sell the company for sometimes a huge capital gain. For example Onyx funds bought Canada’s Husky Injection Molding Systems for $900 million in 1998 and two and a half years later sold the firm for $2.5 billion.

The private equity industry has been booming for the last ten to fifteen years. Warren Buffett’s Berkshire Hathaway, Bain Capital (Mitt Romney’s former firm) and the Carlyle Group are some of the well-known names. Search Google for “private equity funds” and you will find hundreds listed, plus guess who is owned by a PE firm? Chrysler, Ducati motorcycles, Tiffany, Gucci, Neiman Marcus, Hertz, Hilton Hotels, Metro-Goldwyn-Mayer, Toys Us, to name a few. It is estimated that all private equity firms invested globally $1 trillion to buy firms from just 2005-2008. With the growth of the number of PE firms awash with capital, nearly all established firms could be targets.

The Two Main Styles of Private Equity Firms

private-equity-disciplinesWhen a PE firm acquires an existing firm, this is usually a win-win for the PE firm and the owner of the business who gets to cash out. Usually they can still serve in their firms, but this is not ironclad. Some PE firms are ruthless in slashing costs and people, selling real estate, moving production offshore, etc. to try to increase the valuation of the firm very quickly for a “flip” – a quick sale within three to five years to another entity. This kind of PE firm has been described as “nasty” and heavily criticized over the last few years. In addition if your firm is a family business, it can be dismantled by this kind of PE firm. Another kind of PE is described as having “patient money”. These PE firms partner with the management teams to work together to build the valuation of the firm over longer periods of time. While they can be very tough on the management teams, there is a sense of “shared destiny” to build the valuation of the firm.


The Private Equity Formula

So what is the “formula” that PE firms use to grow the valuation of the firms they have purchased and now help to manage?

1. Define the Full Potential of Your Company – The target is large increases in equity value. Getting there requires strategic due diligence and the pursuit of a few core initiatives. This step can be daunting though. Say you have a good business that operates only in Shreveport and you do not like to travel. But what if the full potential of your business lies in it being national in scope? You need to change or hire someone who likes to travel.

2. Develop a Blueprint for Change – The blueprint details how to turn a handful of initiatives into results, choreographing actions from start to a finish line. Key here is PE firms do not confuse effort with results. Results are all that matter.

3. Accelerate Performance – This step entails molding the organization to the blueprint, implementing a rigorous program and monitoring a few key metrics. Key here is if you think something will take two years to do, the PE firm will demand a one year or less cycle time.

4. Harness the Talent – This discipline requires creating the right incentives for managers to think and act like owners, and assembling a decisive and efficient board. Key here is employing incentive compensation that only pays out if targeted increases in firm valuation are achieved.

5. Make Equity Sweat – The challenge is to embrace Leveraged Buyout economics (this means using more debt in your capital structure). This stage calls for managing working capital aggressively and disciplining capital expenditures. Key here is adding assets only if they will contribute to profitable growth firm valuation. A misstep of faulty investment can mean the CEO’s job.

6. Foster a Results-Oriented Mindset – This means making Private Equity disciplines part of a company’s culture and creating a repeatable formula for achieving results. Key here is once milestones have been achieved, the PE firm sets higher milestones.

Is your firm ready to take on PE disciplines, ahead of being approached by a PE firm? Or would you desire to sell your firm to a PE group and cash out? Or is the way you’re running your firm now just fine?

This article is part of a series on what causes a firm’s value to increase

Dr. William Bigler is the founder and CEO of Bill Bigler Associates. He is a former Associate Professor of Strategy and the former MBA Program Director at Louisiana State University at Shreveport. He was the President of the Board of the Association for Strategic Planning in 2012 and served on the Board of Advisors for Nitro Security Inc. from 2003-2005. He has worked in the strategy departments of PricewaterhouseCoopers, the Hay Group, Ernst & Young and the Thomas Group. He can be reached at or