How does a PE firm turn a 100-day plan into a real plan of attack? Part two of the four-part series delves into the nitty-gritty tactical elements PE firms must consider. Experts from Ridgemont Equity Partners, Baird Capital and Grant Thornton discuss how they aim to extract maximum value during the first 100 day timetable.
Planning and Tracking the First 100 Days The Art and Science of Investing
David Snow, Privcap:
Today, we are joined by Rob Ospalik of Baird Capital, Ed Kleinguetl of Grant Thornton, and Jack Purcell of Ridgemont Equity Partners. Gentlemen, welcome to Privcap today. Thanks for being here.
We're talking all about the 100-‐Day Plan. It's a hot topic. There's a lot we could discuss. But since we have three experts here who have done a lot of 100-‐day plans, I'd love to hear about how you do and kind of walk us through the details of how it unfolds.
Maybe starting with Jack, when does the 100-‐day plan begin? Or at least when do you start to think about it? Is it before you've even made the investment? And when do you decide to make the decision to start burning brain cells on putting one together?
Jack Purcell, Ridgemont Equity Partners:
Yes. Yes, certainly, David, before you make the investment. I think waiting until time zero or day one, you could really catch yourself flat-‐ footed. And so it's absolutely at some period before you make the investment. I think how far before the investment time really depends on the process. If it's one of these fairly aggressive auction processes where there's a limited timeline, you don't have a ton of time to do your diligence and spend time with management, the amount of time you can just dedicate to prepping a 100-‐day plan could be fairly condense. You know, two, three, four weeks before you ultimately close.
In other situations where you're working with an entrepreneur or a family to buy his or her business and you've got some number of months, I think you can dedicate multiple six, eight, ten weeks to sort of iterating on that plan. And ultimately, getting it to a point where by the time you make an investment, it's a document that sort of lived and breathed for a couple months. And not only does it have the buy-‐ in of the owner, the private equity investor, but it also has the buy-‐in of the management team. And I think in those situations, that's where you can really hit the ground running at day one after you've made your investment. And so I think it varies a little bit on the process but absolutely before your dollars go in, that plan needs to be baked.
Snow: How do they do it over at Baird Capital, Rob? When do you begin thinking about putting a 100-‐day plan together.
Rob Ospalik, Baird Capital:
Yeah, I agree completely with what Jack said. It begins definitely before the money's on the ground. And with our process, we are going to follow a proactive sector theme. So, we're going to look for an opportunity that leverages an idea, a theme that we have within a targeted sector that we're identifying. And then, it's really going to be driven by the opportunity and the process. So, if it is a situation where we've got some time in advance where the process is less rigid, then, it gives us the opportunity to sit down with management and say really how do we build what we call this path to value for the company? That being the handful of things that we're going to do to fundamentally grow the business during our ownership period. And how do we go about executing that?
In terms of the continual of the 100-‐day plan development, as you get into your diligence and the process of buying the company, that builds on the plan. So, it begins to take shape during that part of the process. So, you're building it up. You're learning more about the company. You're having observations on the company. You've got some takeaways. You've got some cleanup items, perhaps. Those are going into the plan. So, by the time you're getting to your final approval, that plan has essentially been developed. Now, it's not fully set. Because the important part is still to sit down with your management team post closing. And make sure you've got that complete alignment. And sometimes, again, based on the nature of the process, it's difficult to get that necessarily, that complete alignment until you're closed and everyone's on the same side of the table.
Snow: Ed, with the benefit of having worked on many different deals and seeing this process unfold in many different ways, what's the range of ways that sort of the 100-‐day plan is born? And what have you seen as a trend in this area?
Ed Kleinguetl, Grant Thornton:
Well, you've heard both situations mentioned in the sense that the more time up front, the better. And that process can be truncated in terms of a short deal or longer deal. But obviously, the more time, the better to plan, have the plan in place prior to the money being put in, prior to closing. What you see in terms of the 100-‐day plan, preliminary due diligence, you typically already start to look at the risk and the challenges associated with it. Are the value drivers achievable as what was originally perceived?
By the time to confirmatory due diligence, sometimes, there's an integration track already, but there's already thought process going into how can the value be extracted from the deal moving into that plan. And as Rob mentioned, you'll at least have a preliminary plan by the time closing comes around. Still needs to be vetted with the management team. Or in some cases, maybe it's a hands-‐on discussion with the management team leading up to the closing, which is an optimal situation. But something is in place by the closing. More time the better, clearly, to have it fully baked. But something definitive to start with. There is definitely paperwork put in place.
Snow: Maybe we'll talk about Ridgemont. Who is the plan master or whatever it's called? Who owns the plan? What is the team that's assigned to designing it, executing it? Can you describe the human capital involved?
Purcell: Yeah, I think the architect, if you will, the plan. In many respects, these plans have similar elements from deal to deal. Obviously, each portfolio company is very different. But the process and the time investment and the discipline around the process, it's very transferrable from one deal to the next.
And so at Ridgemont, we've got a very structured process about hey, we're about to make an investment in a company. Let's make sure that we've got the tactical elements of the 100-‐day plan nailed. In many respects, you can think of it as sort of the pilot's checklist. Make sure we get all these items completed within X number of days post closing. And creating that list is relatively straightforward.
The strategic elements of the plan around how are we actually going to use the first three or four months to start to create value for this new portfolio company? Those are highly customized for each new transaction. And the human capital that's involved, I mean it's members of the Ridgemont deal team that, very early on, are sitting together, you know every Tuesday morning at 9:30 or however frequently to go through the tactical elements and the strategic elements and creating that list.
And to Ed's point about the opportunities where you can actually bat that around with the management team before you close, that tends to create a document that is the most robust. It has the most buy-‐in from both the owner and from the manager.
Snow: Is it kind of a like a book of scripture, like hey, guys, I see you're doing something and that's not in our playbook here?
Purcell: You know I wouldn't quite describe it as that rigid. I think, frankly, on the tactical side of the equation, those elements tend to be fairly straightforward. And frankly, the majority of the tactical elements, I think, are handled more by the private equity sponsor, often times, than the management team.
On a strategy side, there's some degree of rigidity around hey, these are the three or four big areas we need to go after, we want to lock elbows and go after. I think the nuances around how exactly it gets done after closing, once you sort of have a chance to really establish a cadence with the management team, lock elbows and get one head around how are we going to attack these three or four things. That's where that element of the plan might tweak a little bit. But I wouldn't characterize it, perhaps, as strict as scripture.
Snow: Rob, how do they do things at Baird Capital? Who's assigned to own a plan and execute it?
Ospalik: So, here, I'll bifurcate a little because in our process, you've got the 100-‐day plan and then, you've got the path to value. The 100-‐day plan is really the 100. It is, in fact, that. It's laid out within 100 days what's going to happen during this period of time. It contains a lot of the tactical elements. And within that, it also includes the beginning of the development of what we call our path to value, but essentially, the strategy elements of the plan. So, those do bifurcate a little bit.
In terms of the 100-‐day plan process, that's really me and my team that are driving that with the investment team and with the portfolio company.
Snow: You mean the portfolio operations team.
Ospalik: The portfolio operations team. Thank you. So, that's being driven by the group that we have that's dedicated to focus solely on our portfolio companies. The path to value document, that is ultimately going to be developed and owned by-‐, within our group, it's going to be owned by the investment partner who sponsored the transaction. It's going to be owned by the operating partner who serves as the non-‐executive chairman of the company. And it's going to be owned by the CEO. So, really, among those three, they are going to have a shared responsibility for the development. And then, the execution. And then, ultimately, the board reporting of that plan.
Snow: I'm interested in hearing about charting success. So, whether it's during the plan, charting progress or when it's all done and you look back and you say how did we do? How do private equity firms set benchmarks for whether or not they have done what they said they were going to do? And what are the most common measures that people use, maybe starting with Ed, since you see a lot of activity.
Kleinguetl: Well, it's interesting. It depends on-‐, and there was an illusion to this before-‐, what was the management team like to begin with? Was it highly entrepreneurial or was it more disciplined, somebody had come out of the private equity environment before? The key is to have certain operating metrics. The entrepreneur probably has less of those. The more professional management team probably has more of those. And you really want to keep track of certain metrics within the business, the leading indicators, if you will. That's what the important part is, to get those in place. So, whether it's customer acquisition costs or day's sales outstanding, whatever those key performance metrics, depending on the specific businesses, those need to go into place. And getting people educated to manage the business around those.
One of the things that's very unique, I think, about private equity portfolio companies is the fact, unlike a public company, I always felt-‐, I was a CFO of a private equity company-‐, you have a monthly investor call vis-‐à-‐vis a quarterly investor call. And that really creates a lot of discipline around the process, saying I've got to lay out my results once a month, not once a quarter. And there's a lot of anticipation. And there's a lot more hands-‐on interest in what goes on vis-‐à-‐vis more passive shareholders. So, all those things come to bear in how the business is managed, getting that discipline in place, the cadence about reporting once a month. And so even leading into it, that's why the discussion's up front.
What's the expectation? It's the monthly reporting. How do we do it? This is how it's going to be put in place. If it's not there, how's it going to get there? And on to the strategic things that's tactical. And into the strategic metrics, as well.
Snow: So, speaking of metrics, what are the most important metrics that you followed during this critical period maybe that you would look at first when a report came back?
Purcell: Yeah, I mean I think there's the-‐, back on sort of that pilot's checklist, I think that’s a document that we review weekly with our CEOs of newly-‐acquired portfolio companies. And we use a very simple red, yellow, green stoplight system figuring out if we're on track with certain of these items or behind. A simple system like that used weekly can really sort of illuminate an issue before it becomes a real problem for a portfolio company. And allow you to really focus on it.
Following up on Ed's point about these monthly operating review calls, that's what we do with each one of our portfolio companies. In the first few months of an investment, we have biweekly review calls with our CEOs. And it gives us a chance, in addition to talking about this 100-‐day plan, it gives us a chance to get that CEO's view on the broader management team. How are they adopting to us as a new owner? How are they adopting to the new plan? And so just in terms of the rhythm of interaction, we try and do biweekly calls with our CEOs. In many cases, we're talking more frequently on an informal basis. But formally, biweekly calls with our CEOs. And then, monthly operating review calls. We'll go through a packet of financial information, operational data, with the top three, four, five managers of the company. And tends to be a way, when you have that frequent interaction, and you've got enough pieces of paper in front of you, you tend to be able to follow what's going well? Where are we falling behind?
Snow: Just a quick follow-‐up, and without naming names, what would be an example of an item where there'd be a red light next to it, I guess indicating things not going as well as they should? What's an example?
Purcell: Yeah. I mean just one very simple example, businesses that have entrepreneurial for a long period of time, they tend to make decisions in a certain way. Those decisions tend to be a little bit ready, fire, aim. And under sort of private equity ownership, there tends to be more rigor around decisions, particularly, when it comes to capital allocation.
And just one example is our portfolio companies think about making large capital investments. Those decisions require a business case, discussion at the board level, etc. And in some scenarios where you're transitioning from a very entrepreneurial culture into one that's more of an institutionally-‐owned culture. That transition, sometimes, is a little bit challenging.
Snow: So, if it's hey, we just opened up an Atlanta office, and who decided that? Oh, we just thought it would be a good idea, that would be a red light?
Purcell: Yeah, it's usually not that much of a surprise. But in general, you'll get, in some cases, you'll see a business plan for capital allocation that perhaps isn't as deep and thoughtful as you might otherwise hope for. And in those cases, we'll sort of work with a management team to really get into the position where we all feel great about the capital that we're deploying in the business.
Ospalik: How do you guys see that expectation of communication and approval communicated to your management teams and to your managers to send that across, especially, where it's something that's not been done before? Do you put it in place or do you see it put in place formal board approval authority documents? How does that get communicated?
Purcell: Yeah, you know in the operating agreement, the LLC agreement, when you buy a company, they'll be very explicit. If a capital investment greater than $100,000 is made by a portfolio company, it needs board approval. And what we've done is we've taken that sort of long, nasty-‐ looking legal document that virtually no one wants to read and we'll create a very simple, laminated one-‐pager and hand it to the CEO. And say hey, if you're thinking about making a hire that's in this stratosphere of the management team, this is when you need to talk to the board. This is when you don't. If you're thinking about making a capital investment, if you're thinking about selling a division within the company. This is when you need board approval, this is when you don't. And so it's sort of a cliff notes version of the operating agreement. And the operating agreement actually reflects what we care about. It just happens to be buried in a legal document that's 50 or 75 pages long that no one wants to open up, me included. And so just creating that little cliff notes version that's laminated that says hey, here are some rough guidelines of when we should talk, when we shouldn't talk. That's really helped with our portfolio companies.
Ospalik: Yeah, we use these cliff notes terminology quite a bit to sort of summarize here's this mountain of paperwork that we just all executed here. Here's the salient points and what came through. And then, we do do a board approval document as well.
We're going to start laminating it though.
Snow: And color coat, too.
Snow: One final question. What happens at the end of the 100 days? Is there a memorial meeting? Do you track progress? Do you decide whether or not there should be another 100 days? What's a typical way to wrap things up?
Purcell: Let's see.
Snow: Is there a party?
Purcell: A fireworks show, maybe. Ironically, a lot of the sort of punch list items what we've talked about where you sort of are cleaning up things after a deal closes, those happen in a normal course. And they take 30 days or 60 days or 90 days. And so what you're left with at the end of 100 days is, hopefully, a lot of sort of checkmarks in your punch list. And then, really, sort of the meet of why you invested in the business. And the three or four or five big areas where you think you're going to create real shareholder value.
And when you go from day 100 to day 101, it's really just a continuation of focus on those initiatives. And there probably is not the same amount of rigidity around let's talk every Tuesday to make sure we're creating the closing balance sheet that we know we need to deliver to the seller 90 days after closing. But those big items continue to get focus and regular focus, certainly, monthly focus.
Ospalik: Yeah, I agree with, Ed. I think it becomes business as usual, but business as usual, as defined in the context of a Baird portfolio company. And then, that's the important thing. I think that after that period of time, going back to what we originally said is what your expectations saying during this period of time. So, now, if we've been successful, we have a better feel for how management's working with us, how we're going to work with management. And management, hopefully, has that same understanding. And what I think naturally happens is that it involved into really, the board governance process that has been established during that first 100 days. And now, we're in agreement, in terms of what we want to go after, with respect to the strategic aspects of the business, the path to value. And let's go get that done. And recognize that we're going to talk about that at the board level every meeting.