Private Equity Investment – An Alternative to Management Consulting
Part 1: How do I institutionalize my successful family business?
As a financial services firm, we at Awad Capital often find ourselves intermediating between Corporations and Financial Investors. Actually a large proportion of our work is raising financing for companies and a big part of our investors are financial investors, either private equity or family offices.
In a previous blog, I wrote about the reasons why our clients sell their companies. As we spend more time with our clients and become their Trusted Advisors, we often uncover needs which go beyond financing and exit strategies. These are sometimes more strategic and have to do with the challenges of growing a successful business. Or they can be about getting the business ready for going public or for a full sale.
One powerful theme that has emerged, is how much value a private equity investment can add to a company. This value is maximized if the interests of the investors and management are well aligned towards value creation. And of course, choosing the right private equity investors is key, to ensure they bring more to the table than just capital. We have many such investors in our network and we can connect them with the right investment opportunities where their skills, whether financial or broader, can be best put to use.
What does a successful business need to do to become a great business and command a valuation premium in either the IPO or the M&A markets?
1. People
To transform a family business into a successful institution, many steps are required, but these all start with good people. Moving away from having the decision making on all topics being concentrated with a handful of family members, to it being delegated to a number of high calibre specialized professional team members is one of these. Key personnel required to institutionalize a family business may include:
- Chief Financial Officer: A strategic function often misunderstood in our region and confused with the accounting roles
- Head of Marketing
- Head of Legal
- Chief Technology Officer
- Head of Human Resources
In a family business, it is not unusual to see these functions non-existent or being performed by the founders or being staffed with significantly under-qualified people.
2. Systems and procedures
Once the right people are in place a set of systems needs to be implemented to ensure the correct decision making is taking place, and that best practice is followed for execution and reporting.
3.Corporate Governance
To protect the shareholders, including potential minorities, good corporate governance needs to be implemented. The role of independent directors is only starting to be understood by regional family businesses. Corporate governance is sometimes confused with the authority matrix. A wholesome corporate governance structure includes the authority matrix but also includes a much broader set of frameworks that ensure a sustainable functioning of the organization, taking into account the interests of all its stakeholders. This is of course crucial when launching an IPO or bringing in non-family investors. But it is important to realize that good corporate governance can also be a major driver of improved performance and profitability for fully family-owned businesses outside of the context of financing transactions.
4. Financial efficiency
With better people and processes in place, the stage is set to improve the company’s financial performance. This can take a multitude of shapes:
- More disciplined budgeting helps drive growth
- Improved forecasting leads to better alignment of resources to opportunities
- Cost cutting or just better management of existing resources can boost margins quickly
- With better financial awareness, emerges the possibility of using prudent leverage to enhance shareholders returns on equity
5. Scale
Finally, the time comes to take the company to the next level. Growth and expansion can take a multitude of forms:
- Increasing revenues in our existing products in our existing markets
Addition of more products in our home market - Geographical expansion into new countries
- Inorganic growth via acquisitions
A well-managed and profitable company is best positioned to grow profitably and with limited risks. Once the foundations are in place, exponential growth can follow with surprising ease.
6. Public relations
Now that the success is here, it is important to get the good news out. Strong public relations are crucial to achieving many of the company’s essential objectives:
- Attracting and retaining the best talent
- Enhancing the company’s perception with existing customers and helping to acquire new customers
- In the case of public companies or companies looking to go public, Public relations overlap with investor relations and are an essential part of supporting the company’s access to the capital markets
- And of course, maintaining a good image in the community generally, including by supporting worthwhile causes and communicating appropriately around them
This is a very long “To Do” List for any business leader who is already too busy keeping the business going. How can it be achieved? A very commonly followed route in our region and the rest of the world, is to call on external consultants to help implement all these changes:
- Head Hunters can help recruit the needed people
- Management consultants can orchestrate the entire process, make recommendations on the systems and procedures as well as the corporate governance
- Consulting and accounting firms will provide advice on improving the financial metrics
- Public relations firms will offer to run the firm’s overall communications and outreach efforts
Many of these service providers offer very valuable advice. But a few issues emerge:
- Sufficient time and resources need to be available and dedicated to get the best out of the consulting services being offered
- Advice remains advice and the burden of execution remains on the shoulders of management
- There is limited alignment of interest given the remuneration structure of most outside consultants is generally based on time and efforts rather than any quantifiable “Success” factors
Some of our most successful clients have been able to navigate these challenging transformations without spending a penny on external advisors.
Read about it in part 2 of my blog: “Private Equity Investment – An Alternative to Management Consulting. Part2: How our best clients get paid to multiply the valuations of their companies”