Multiply Your Profitability with The Private Equity Perspective™
Have you ever wondered how a professional business buyer would look at your business? Even if your intention is to keep and grow your business, it is a profitable process to consider this point of view.
What would they like about it? What would they not like about it? What would they see as a deal killer? But most importantly, WHY would they or why would they not buy your business? Read on and discover some of the most powerful techniques to increase the profitability of your business.
We have a favored investment in the private equity world. It is buying a profitable company with an unprofitable leader.
The only reason professional business buyers buy businesses is to make money. Other benefits are also important, benefits like serving the community, making a difference, providing for the welfare of the employees and others. These are all parts of a holistic approach to a sustainable and fulfilling business.
Yet, none of these aspects of business can survive without the prerequisite of profit. The alternative is a charity. The focus goes to profit when a private equity (PE) fund or other sophisticated buyer evaluates projects in which to invest.
The business strategy of PE funds is to buy a business, enhance it by increasing the profit, optimize the profit, and then sell it. Businesses can also be held long term. PE funds view the profit of a particular business in a very specific way. Profit is the primary indicator of the value of the business; the more profit, the more valuable the business. The value of any particular business is a multiple of its profit. The industry, stability, management, etc., determine the multiple.
Some businesses are much more profitable to acquire, own, and develop than others. PE funds use targeted methods and strategies to increase profits within a business. These methods maximize return for a business acquisition or investment. We call these methods the Private Equity Perspective™, and we use this Perspective to screen multitudes of possible projects into the best acquisitions. This provides the greatest return on investment. There are many, many factors that go into the analysis. We have a favored investment in the PE world. It is buying a profitable company with an unprofitable leader.
This creates owners that experience the business as more of a burden than an asset.
This situation almost always presents a powerful and profitable business opportunity. What this scenario looks like is an exceptional core business with a leader or management team that hinders or blocks the business process. The owner usually does not even see it, but they definitely feel (and are constantly dealing with) the symptoms of it.
There is a common pattern that shows up for the leader in this situation. He or she is often frustrated, stressed, and feels compelled to micromanage the processes and performance of the team. Leaders often experience being overworked as they try to carry the load. This leads to many owners becoming disillusioned and feeling trapped as they are unable to find good, reliable help. It is an unfortunate twist that "A" players are not attracted to this type of business. It perpetuates the cycle. This creates owners that experience the business as more of a burden than an asset. It makes them more receptive to selling out.
The leader is often unconscious to the behavior contributing to the situation and/or is being driven by emotion. When a PE fund acquires one of these companies, there is often a predictable process to shift the company. A few simple changes can result in a massive return on investment and pave the way for future growth.
Some of the most basic changes we use to multiply profits in these cases are to:
Get the leader clear on what success looks like – corporately and personally
In a buyout, replace the unprofitable leader if the above isn’t possible
Bring all stakeholders onto the same page and align them to the organizational vision
Determine where processes break down or overlap in the business
Establish and bring attention to the importance of predictable systems
Produce measurable indicators that guide performance
Draw out and resolve negativity or distrust
Instill an open environment of performance and integrity
The power these steps have in eliminating profit leaks in a business is profound. There are usually significant sums of money left on the table due to the inefficiencies. Counterproductive behaviors produce wasted resources.
Not everyone is up to this process. It can be personally challenging for the owner/leader. Many factors combine to prevent progress or the dreaded “c” word - change. These include relationships, family dynamics (in family businesses), long-standing “ways of doing things,” and corporate inertia, etc. These factors are often at the root of many of the profit-leaking dynamics in these businesses. Unprofitable leaders consciously or subconsciously tolerate or even avoid these damaging situations.
This points to one of the true advantages we have in the PE world. We have the freedom as a third party to look into the inner workings of a business with no emotional attachment. We objectively see things exactly as they are with no stories, explanations, or excuses.
How do you run your business? Would a PE fund want to buy your business? Would we want to buy it because it is a well-run asset or because it is an opportunity to pick up a quick return on investment through some simple changes? If you could step back and imagine what we would see in your business, could you and would you want to see it? Take the time to reflect and envision this process. From a different perspective, can you see where the lost profit is going?
We see the magic of this process every day. Any owner can choose to operate their business as a professional investor. When they do, these owners can multiply their bottom line in a very short period of time.
P.S. Whenever you’re ready… here are three ways I can help you stop profit leaks and surprises and maximize the value of your company:
1. Take a deeper dive into The Private Equity Perspective™ in Part 2 and discover the next steps to create more predictability which puts the fun back into owning your business. Just private message me "PE Part 2" to receive it.
2. Join Our Implementation Program and be a Case Study: I’m putting together a new consulting case study group inside The Boardroom for Profitable Leaders™ this month… stay tuned for details. If you’d like to work with me on minimizing stress and surprises while blowing up your bottom line… just send me a private message and put “Case Study” in it, and I’ll get you more info.
3. Work with me and my team privately: If you’d like to work directly with me and my team to increase your profit margins by multiples and only have A players on your team… just send me a message and put “Private” in the first line… tell me a little about your business and what you’d like to work on together, and I’ll get you all the details.
About the author: Prior to focusing on Main Street private equity investments, Dan Smith worked as a Wall Street Private Equity advisor and investor. He evaluates businesses in which to invest or buy using a very specific process unique to the field. Whether on Wall Street or Main Street, once an investment is made, Dan and his investment funds used key processes to maximize the returns. As a whole, we call these processes the Private Equity Perspective. We created The Profitable Leader™ to partner with select businesses. We share the strategies with business owners to expand their profitability and maximize value.