Bolt-ons are great way to increase the value of a platform company. Often a bolt-on company can be purchased for an EBITDA multiple lower than the platform company and with the right integration and value added activities, realize the uptick in EBITDA multiple from the platform company upon sale.
All private equity firms are in the business of generating a return with someone else’s money. The ultimate metric of that is ROIC and there is a lot of research shows that it is linked to long term value. While most finance people know it is Net income / Net Assets, what makes up that metric is viewed quite differently by the private equity firm compared to the previous owners of your company. Here are the major items that you need to navigate as the finance leader in your organization.
There is no rest for the weary, or at least for the finance chief in the midst of a transaction with a private equity group. Now that you know the ground rules of private equity and have learned how to get your financial house in order the fun(d) is just getting started. In Part III Kevin describes the preparation required for and the art of negotiating. Enjoy Part III with Kevin.
A lot of mid-market companies have “okay” financial processes to meet the requirements of their annual review-level financial statements for the bank. Unfortunately, annual financial statements, produced several months after year end, almost never meet the requirements of your new investors whose job is to make a return with other people’s money. You will find that they take this role very seriously and will never be satisfied with the current set of reports and analysis. There will always be more needs for analysis, insight, and reporting as the business changes and they become more familiar with your company. Further, they will ask for scenario analysis and one-off reports as they look at potential bolt-on opportunities. It can be tough for some finance professionals to live in a world of constant change and requests, especially when your current management team may be quite satisfied with what you and your team provide to them today.
With over $1.6 trillion dollars available and returns that tend to be better than public markets, private equity firms are looking even harder and deeper at companies they can invest in. Many private equity firms are focusing on mid to lower mid-market companies as places to invest. These companies make up a significant portion of the economy and can generate attractive cash flow and returns for investors.