Lessons From Private Equity Any Company Can Use, by Orit Gadiesh and Hugh MacArthur

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Orit Gadiesh is the Chairman of Bain & Company, a consulting firm with a well-known franchise in strategic due diligence for private equity firms. Hugh MacArthur is the head of Bain’s Private Equity practice.

Their book seeks to share lessons from private equity that can be applied to any company:

Define the full potential:

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, i.e., a target equity value in 3-5 years. Strategic due diligence is the way to set the number, and pursuing a few core initiatives that will grow cash flow is the way to get there:

1. Conduct a rigorous due diligence:
   • Strategic due diligence.
     • Collect facts on the key drivers of demand and how they are likely to behave in the future (derived demand analysis).
     • Interview customers to understand how they make purchase decisions and how your products and services stack up against competitors (customer analysis).
     • Compare costs and performance to competitors (competitive analysis).
     • Determine if regulation or technology changes will impact the business (environmental analysis).
     • Assess where and how the business makes money, and if some products or customers are unprofitable (microeconomic analysis).
     • Build an objective fact base of the business and its industry.
     • Interview customers, suppliers, competitors.
   • Accounting review.
   • Legal review.
   • Review of other liabilities.
   • Background check.
2. Determine the full potential of the business and what it could be worth in 3-5 years (target equity value).
3. Identify the few key initiatives (3-5 critical ones) that should be emphasized to reach that full potential, focusing on the actionable.
   • Incremental moves that will make current activities more profitable.
   • Bold departures that will reposition activities for future success.
   • Shifting of resources away from activities that do not represent the future.
4. Make clear what the company is not going to do.
5. Do a culture check.
6. Ensure the company has a sustainable wealth creation platform (for the next buyer).
7. Renew the process every 2-3 years.

Develop the blueprint:

The blueprint is the detailed road map for getting to that full-potential destination—the who, what, when, where, and how. It zeroes in on the few core initiatives and delineates a step-by-step plan to turn them into results, with an emphasis on measurable actions.

1. Start with the 3-5 year full-potential equity value, and the few big initiatives that you have decided to embrace aggressively.
2. For each initiative, detail the actions, resources, timeline, milestones, metrics, and deliverables attached to it.
3. The blueprint process can take 2-6 months.

Accelerate performance:

Once your priorities are identified and blocked out through the blueprint, the overriding goal becomes to accelerate the performance of your company. This involves molding the organization to the blueprint, matching talent to key initiatives, getting people to own them, and creating a rigorous program to achieve your ends (combining tools, discipline, and the monitoring of a few key metrics).

1. Make the blueprint the center of senior management dialogue.
2. Match talent (internal or external) to key initiatives.
3. Make someone own each activity.
4. Adopt a program office (cross-functional team which ensures each initiative delivers value on time and reports to senior management every 2 weeks).
5. Monitor what matters: key operating metrics (looking forward), cash.
6. Tie rewards and compensation to performance, to motivate, align, and create a sense of ownership.

Harness the talent:

The best-laid plans go nowhere without the right people to implement them. This requires creating the right incentives to recruit, retain, motivate your best talent, and get them to think and act like owners. It also requires assembling a decisive and efficient board.

1. Insist on performance.
2. Quickly replace senior managers who fail to deliver.
3. Seek managers with the drive (hunger for success, willingness to put their own financial upside at risk, enjoying the challenge of transforming a company) and ability to make investments succeed.
4. Motivate them in the right direction by giving them an equity position that grows when targets are hit.
5. Assemble a value-added board: active and talented participants, with skills that are of significant value, who maximize action and minimize process and politics.
6. Make the board decisive and efficient: set up subcommittees focused on key initiatives, find ways to get the board to ask critical questions sooner.

Make equity sweat:

Embrace LBO economics, which calls for managing working capital aggressively, disciplining capital expenditures, and working the balance sheet hard.

1. Embrace leverage. Determine the amount of debt you are comfortable with.
2. Focus on cash generation. Get an accurate handle on where and when you begin to make cash. Start with debt service, and figure out how much EBITDA you need to generate cash given working capital requirements for sales growth, and capex.
3. Aggressively manage working capital, capex, other assets (unproductive equipment, underperforming divisions, traditionally fixed assets).
4. Invest capital with discipline. Make sure individual investments are closely monitored for performance.

Foster a results-oriented mind-set:

The goal is to inculcate PE disciplines so that they become part of the company’s culture and create a repeatable formula for achieving results.

1. Make it a repeatable formula. Define the blueprint, test it, monitor it, figure out what’s wrong, recalibrate, and move forward again.
2. Demand accountability. Push accountability down to its most efficient level. The BU managers have to feel they are on the hook to deliver results.
3. Articulate and communicate. When you lead change, you must make sense of it for everyone else, by explaining why business as usual won’t work anymore and why aspiring to change for the better is the best plan for all (far better chance of achieving the company’s goals, creating more jobs, more opportunities, more authority and greater financial rewards). Use creative tools to reiterate your message (e-mail updates, phone messages, teleconferences, videoconferences, town hall meetings).
4. Set the striking example. Take actions to show things will be different, e.g., remove doors, eliminate unnecessary meetings, keep them short, visit major plants and offices regularly.
5. Reset the standards. Repeat the process every 2-3 years to make sure the current blueprint makes sense and you are not missing opportunities for even better performance.