THE ANATOMY -AND IMPORTANCE- OF THE 100-DAY POST INVESTMENT
For private equity firms, notice of a pending investment often allows for creation of a 100-day plan. The rationale for establishing a 100-day plan is that holding periods are such that a “quick start” is a key factor in value creation. Research indicates that there is a disproportionate positive impact of early decisions on returns; firms that plan for a “ready – aim – fire” approach to management post-closing realize that value. The following outlines key components of a 100-day plan and how these initiatives position a company for a strong start.
LEAVE NO STONE UNTURNED
It is critical that each functional area - marketing, IT, operations, HR, business development – have a specific plan that requires attention post- closing. Even if one area doesn’t warrant significant post-closing attention, a comprehensive plan is required. In marketing, for instance, there might be initiatives in rebuilding SEO that can be tackled immediately. In HR, an equity program is often a part of PE ownership and can be addressed immediately. The point is that each functional area needs to have its own series of initiatives, timelines, and short-term objectives established as part of the 100-day plan. It is the CEO’s responsibility to understand the mosaic for how these functional initiatives weave together as part of the plan.
HIT QUICKLY AND SURGICALLY
For 100-day plans that are created pre- investment, immediate cash flow improvement is an important return factor. “Quick hits” in the form of short-term cost savings and revenue enhancements can start post-closing. Revenue hits are not as evident in the short-term, and thus more challenging. However, short-term hits in expense savings can allow an investment to kick
off with an increase in cash flow. In the headcount reduction arena, for instance, it is important to act decisively and cleanly to avoid a long-term culture of fear.
EXECUTE ON PE FIRM RELATIONSHIPS
Some of the quickest revenue hits can occur through leveraging PE firm relationships. This occurs when the PE firm has relationships with potential clients who the company might not have had the opportunity to reach previously. This is often the case with smaller firms that have excellent products or services, but not the market presence or gravitas to get in the doors of large potential clients. This type of “door opening” in the initial stages of an investment provide immediate revenue generation opportunities.
A PE firm partner had deep relationships with several large companies. Immediately upon closing of our deal, our PE partner called contacts at several of those companies. Meetings were set up for our sales team with each of these firms, resulting in significant sales for our company. These sales were the direct result of strong private equity relationships.
CREATE THE REPORT CARD
PE firms insist – no, demand – highly efficient and effective reporting on performance metrics. Reporting of the caliber required by PE firms and lenders, for that matter, rarely exist with privately held companies in the middle market. Between non-partners at the PE firm and the finance department of the company, key performance indicators should be established early in the investment. In addition, a process for collecting the data and producing it on a systematic basis needs to be established by the company as it is never a given that producing timely data occurs with private entities. This initiative should be a key priority in the earliest investment stages.
INVEST IMMEDIATELY
As investments are underwritten, there is often high clarity on areas where under-investment has occurred. In the middle market, this often occurs in IT, marketing and sales. Identifying these areas prior to closing allows for quick action to fortify these areas from day one.
In a recent investment, the finance operation ran on QuickBooks. The software met the needs of the private company, but was insufficient in generating the reporting required to meet investor needs. An immediate investment was made in a more sophisticated platform after pre- closing analysis of different alternatives.
It is not always the case that the post-closing investment reduces expenses or increases revenue. Often the investment is required to improve the infrastructure of the target company in a manner that allows the type of scalable growth forecast in the investment model. Investing in the future of the enterprise can and should happen in the earliest investment stages.
EXECUTE ON BUSINESS DEVELOPMENT INITIATIVES
As with other initiatives, identifying and then reaching out to prospective add-on acquisition candidates is a critical initiative in the first 100 days. The source of these opportunities are both the management team that knows the competitive landscape and the PE firm that is aware through investment banks and brokers which firms are on the market. PE firms utilize different theses for investments, meaning that M&A is important for some investments and not as important for others. If bolt-on acquisitions fit in the investment thesis, the first 100 days is an opportune time to commencement discussions.
Within 30 days of an investment closing, a PE firm requested that our team take responsibility for another company that the firm had invested in six months prior. Our 100-day plan was restructured as we focused on integrating the operations of the target company. The result was a significantly larger, more profitable entity, due in large part to an effective integration plan.
CREATE THE BOARD OF DIRECTORS
It is never too early to create a Board of Directors that meets the oversight needs of the company. If the Board was not created prior to the investment being made, the first 100 days is the appropriate time frame to identify, interview, and retain Board members. An effective Board can be a major factor in creating value for PE investments, if created and utilized properly.
MONITOR SYSTEMATICALLY NOT EPISODICALLY
There is a discipline required in creation of a “planning grid” and, even more important, managing to this plan in a highly rigorous and structured manner. Privately held middle market companies are not, as a rule, as conversant in planning as private equity owners require, so this is a “new discipline” for many companies. A 100-day plan needs to be tightly structured, line item by line item, with due dates, interim deadlines, and complete accountability. Without rigorous management of the plan, it is not worth the Excel spreadsheet that was created to build it.
ESTABLISH FRAMEWORK FOR FIVE-YEAR PLAN
In response to a question posed of a private company CEO years ago, the officer stated that “short term planning was where we are going to lunch, long term planning is who is paying”.
The tone of this statement is not unusual in the middle market. However, it is antithetical to the tenets of a PE firm that has a defined investment and operating time frame. A key requirement of a 100-day plan is to establish a planning framework for a multi-year strategy. In addition to the framework, it is also often necessary to start building a culture with the management team for how long-term planning takes place.
HIT THE ROAD FOR A LISTENING TOUR
Another effective way to learn about what is happening with a company is to hit the road to talk to key customers, suppliers, and related constituents. The insights gleaned from these visits will not only provide insight into how the company’s products and services fare in the market, but also show a level of respect toward the clients that is appreciated. An orchestrated out of the office tour is the most effective use of external time during the first three months plus.
PE FIRM NEEDS TO “TALK THE TALK”
There can never be too much communication during the first 100 days of an investment,
especially from the new owners. Transitions are often scary to employees as they wonder what the future holds for them. They look to leadership and ownership for answers and it needs to be a mandate on the part of leadership to communicate about the future. We all understand that it is difficult if not impossible to discuss what the specifics are of that future, but it is counter-productive not to be as encouraging and candid as possible in the initial stages of an investment.
WALK THE HALLS
In situations where there is a new CEO, that individual should spend as much time as possible meeting with key company employees to discuss the impact of the transaction on the employee base. These meetings provide invaluable insight into how the company operates “from the inside” including what is working effectively and where there are opportunities for improvement. Themes start to appear, concerns that had previously been held under wraps, and ideas that were never discussed all come from these meetings. It is by far the most important action of the first 100 days of an investment.
ABOUT THE AUTHOR
James Still is an operating executive and Board of Directors member with extensive experience in the middle market. His sector experience includes business services, education, training, health care services, and financial services. Formerly the CEO of five privately held companies, he has a passion for leadership. This is the second in a series of thought leadership articles centered around best practices for Boards of Directors, private equity owners and operating management.