How to build value after a PE transaction

As private equity (PE) looks to invest in a business, there’s significant time spent developing a five-year plan for the partnership. But while much of an M&A deal is a very data-driven, analytical process, the relationship aspect is equally important.

“Business owners need to trust their gut during an M&A process,” says William J. Bergen, an Operating Partner at Kirtland Capital Partners. “If a seller likes the potential buyer and believes they can work with them when times are challenging, they should. If they get a feeling contrary to that, they’re probably also right.”

Building a robust strategic plan with the necessary investment to support the plan is a great foundation. Executing it with the right team, Bergen says, is essential to success.

Smart Business spoke with Bergen about how to work with a PE partner to build value after a transaction.

How does a PE partner approach strategic planning?

Some businesses already have a robust strategic plan that lays out a detailed forecast and investment plan for the next three to five years. That’s, however, more the exception than the rule. More often, the business has a shorter term forecast — ideas of where it will finish this year or next. PE will assist a management team to refine those shorter-term plans with more detail, including what investments are needed in people and equipment, then build it out for a longer time horizon. This requires a lot of work, jointly and independently, with the business ownership and management team to get a 360-degree view of the industry, the individual business and its niche within the industry. Information can also be drawn from industry and trade groups, customers, competitors and suppliers. That information is used to develop and refine the initial five-year forecast.

This plan, along with the information used to shape it, is shared with the owner and the management team to jointly come to a final plan that aligns all the players. This sets the foundation to build a joint five-year strategic plan within the first 180 days of the new partnership. Through the next six months, the partners continue developing, refining and adding additional detail to that plan.

How might such plans fail to materialize?

There are two common areas that can challenge the execution of five-year plans. One is on the people side. That could be because of post-deal turnover, or the plan to build out the necessary management talent and depth either took longer or was more difficult than initially thought.

The second significant challenge often arises from unforeseen changes with customers. For example, a business might have a significant customer concentration with one to three customers. When something happens to one of those key customers — a product or relationship change, or something changes the strategic direction of the customer — the business needs to adjust its plan to respond to the challenge. Even more broadly, plans can be disrupted if the market undergoes a fundamental shift where demand is significantly lessened or changed in some sort of structural way where the product or service needed is different than what the business is doing, and it may not be easy for the business to adapt to that new need.

What can happen if there’s a failure to build value?

A failure to build value after a transaction can significantly impact both the time that it takes to achieve the projected value and the absolute level of value that can be created. Challenges like that put stress on the relationship between the management team and the equity group, which emphasizes the need to establish strong relationships built on transparency, honesty, open, frequent communication, and strong alignment of interest between the management team and the equity group.

Over the course of a five-year relationship, there are going to be challenges. How both sides handle those events affects both the destination, i.e. how much value is created, and the journey — how enjoyable the experience is.

When approaching a potential deal, having alignment between the management team and the equity group around what the destination looks like is critical. So, which equity group a business chooses as a partner is key in terms of both what is accomplished and how positive the experience is in attaining the shared goals. ●

INSIGHTS Private Equity is brought to you by Kirtland Capital Partners

William J. Bergen

Operating Partner


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