Experts say the first 100 days following the close of a private equity deal is the most critical time to implement changes. But what if plan doesn’t go as planned? Experts from Grant Thornton, Baird Capital and Ridgemont Equity Partners share their firms’ stories on when 100 day plans don’t pan out and how they’ve responded and learned from these experiences. This is the fourth and final installment of Privcap’s thought-leadership series on value creation.
When 100 Day Plans Don’t Go As Planned
The Art & Science of Investing
David Snow, Privcap: Often, with any plan, things don't always go according to plan. Things change. People don't do what they said. Things aren't what they seemed. I'm interested in your stories of things not going according to plan - and how you responded and what you learned. Maybe starting with Ed. You advise many clients on this. And I would imagine that not everything always goes as they should.
Ed Kleinguetl, Grant Thortnon: Not always everything does but for example, years ago, and I see this not as much the case though, the owner would be told nothing will change. And the reality is a lot will change, particularly, in financial reporting, budgeting and all the type of control areas. So, today, what we see is people managing expectation on the management team, engaging much more in dialogue, coming up with a commonality or the trajectory of where the business wants to go. But not giving them the false illusion that nothing will change because there are significant changes, particularly, if a entrepreneur that had the say on everything and now, a monthly management meeting, the budgeting, the capital expenditure process and things like that. So, that's pretty critical.
In other areas, if there is an opportunity for growth, anything that's a growth area or a synergy, there needs to be a plan in place. In some cases, people would think it just magically would happen. So, we've all agreed this is how it's going to happen, yes, but there really needs to be a tactical plan of how to get from A to B so that everybody's on the same sheet of music, if you will. So, I think that becomes very important. I've seen it not be that way, leaving too much to the entrepreneur. Did you understand what we wanted to do? Yes. And then, wondering why 90 days, 100 days, a year later, the return wasn't what was anticipated.
Snow: So, often times, there's a failure of communication about expectations of the plan and that is often part of the shortfall.
Kleinguetl: That and the fact that the rigor of the plan isn't there. Now, again, I've seen, in the last five-to-ten years, much more discipline, much more rigor, much more focus on these areas because there has been enough mistakes made in the historical past.
Snow: Sometimes, everything clearly communicated. And yet, you still are falling short somewhere. Or you discover maybe it's not the right plan. And without, Jack, necessarily naming names, any interesting stories to share that are illustrative of this possibility?
Jack Purcell, Ridgemont Equity Partners: Yeah, we certainly had situations where you do end up off the tracks a little bit. And usually, it is related to folks on the senior management team. That invariably is where things break down. I think there's sort of three ways fundamentally that you hedge against that.
The first, Ed talked about which is completely open communication about hey, here's the plan we're embarking on. Does this feel right for you? Are you up for this? You know I think the simple is creating the best alignment that you can and saying to the senior management team hey, if things go well, you're completely aligned with us. And as we create shareholder value, you're participating right alongside of us. And so that alignment of interest, I think is really powerful.
And then, the third thing on the front end, what we do at Ridgemont with every new investment we made is we put the top handful of managers, at very early stage in our diligence process, through a rigorous, half-day psychological assessment where we really try and peel back the layers and figure out is this individual up for the challenge of private equity ownership and what we're sort of about to embark on?
And so I think those three things are the best ways to sort of minimize the risk of disruption. But invariably, things happen. I mean just one example that I've experienced personally is particularly in the finance department. The amount of stress and strain on a finance department pre and post private equity ownership, it can become pretty intense. And a very, very good CFO or controller in an entrepreneurial-owner environment might not pivot and transition well in a private equity environment. In those cases, we've had to make transitions or at a minimum, sort of augment the finance staff to really deal with the financial reporting, the financial analysis that any private equity investor is going to require.
It's certainly happened. I think, generally, when the plan breaks down, it does revolve around people more so than an asset or a piece of a paper that you've put together. It's usually the people that are checking up a little short against the execution.
Snow: So, it's usually one of execution and not necessarily because you kind of picked the wrong strategy or you picked the wrong tactics?
Purcell: Yeah, I think the strategy can definitely pivot over the life of an investment. I think, today, when we're talking about this 100-day plan, that's a fairly short window. In a five-year, private equity hold, that's five percent of your investment horizon. And so I think, rarely, do you get today 62 and decide hey, number three on the strategy list was completely wrong. Let's pivot in a different direction.
So, I think there are situations where there are strategy tweaks or strategy pivots. But I think in that first 90 or 100 days, it tends to revolve more around human capital than it does necessarily the playbook.
Kleinguetl: Many times in the early days, the strategy was focused on the growth and the opportunities. And the finance organization got very little thought. And it is absolutely true that that's where the stress level grows because the reporting is now magnified. There's much more expectation, which means much more work. In fact, in my own situation, I came in as a replacement CFO for somebody who had quit under the stress of the situation of new ownership. So, the fact that there's a focus on that, helping them to make that transition and being conscious of that, not just the customer-facing-type situations is already a huge change in the way private equity invests.
The psychological profiling, who would've thought of that in due diligence ten years ago?
Snow: Rob, any interesting stories to share about plans not always getting off on the right foot?
Rob Ospalik, Baird Capital: Sure. You know I think there are several buckets that typically would occur. And the management changes that we've done particularly on planned management changes that we've talked about, acquisition strategies are things that we have gone into investments with a path to value around and always control-, fully control your destiny around that. And then, there are acts of nature that impact or just large, external or sometimes, internal events that impact a business negatively.
In all three of those areas, you can quickly find yourself a little bit off the tracks, in terms of what you had planned to do. I think we have certainly seen the situation where post investment, we've seen managers, CEOs of our businesses that have left. And that's always a difficult thing. We talked about the management assessment as something we do as well. But sometimes, just the stress of the new ownership, coupled with the fact that you're handing a manager or an entrepreneur a lot of money lends itself to a situation where you may lose someone.
We've had that occur in situations where that's been very disrupting to the business. We've had in other situations where we've gotten through it. And in retrospect, it's been a good thing for the business. I think our key takeaway in that area is that where you have a person that maybe you had some questions about, they're going to be getting a lot of liquidity. Maybe it's their second bite at the apple to have a team behind, that have a person behind that. Where that's worked pretty seamlessly is a situation specifically where we had a founder/entrepreneur who left the business. But we had brought in a president to work with that entrepreneur. And as he stepped away, it actually made for a relatively seamless transition to the president where we didn't have that same handoff readily available. Now, all of the sudden, we're out doing a CEO search that's certainly much more disruptive. And was disrupting to the business.
I think in terms of the other areas, for acquisitions, acquisition strategies certainly don't always go as planned. There, I think, you need to be prepared to just own and run your business as is. And be comfortable that you've got a good platform, just in what you have in the event that you're not able to successfully execute an acquisition strategy.
And then, around the external events, I mean we've had everything from floods, hurricanes. We've had fires, actually.
Snow: And that wasn't in the plan?
Ospalik: Not in the plan. Not in the plan. And there, you need to go into triage mode and you need to communicate. And if that ends up having an adverse impact on the business, which it, often times, does, from a financial standpoint, you need to be communicating listen, here's where we're at today, but we turn this corner and value rapidly comes back just as, unfortunately, as rapidly as it can leave the business. But there's a path to value coming back and making sure that you don't lose people in stressful situations just because things haven't been communicated appropriately.
Snow: And following up on a point that Jack made, have you also found that it is within the finance department that you sometimes see difficulty in adapting to the more rigorous private equity ownership?
Ospalik: Definitely. I think if you surveyed most private equity firms, you'd see that the most common area where there's a change that occurs is in the finance area. And I think we've tended to have a bias that way. We see the stress that comes from new ownership, from a new environment and often times, that is place, unduly, on the finance staff, particularly, in the early days of the investment. And there, we've been, I'd say, very aggressive, in terms of candidly assessing the talent that we have in those finance organizations. And making changes where we need to. And what you find is you get some much leverage from a good finance organization that it is tremendously valuable. And it's underappreciated, I think, in entrepreneurial businesses. I think it's underappreciated in sales-driven businesses. Sales-driven businesses are good things to have but you certainly get a ton of leverage. And we see that when we do make those changes successfully, the organization sees that appreciates it.
Purcell: One follow-up I was going to make to a comment Rob made earlier about really trying to sort of hedge your bet, if you will, around an unplanned CEO transition, I'd completely agree with you about really sort of buttressing that individual with a solid number, too, that God forbid, something did happen, whether it's planned or unplanned, you've got someone who can ultimately step into those shoes.
I think the other is sort of buttressing from below. I think the other way that we've found to be pretty powerful over time at Ridgemont is having an operator, an independent director that's been an operator, that's been a CEO, that's been a CFO of a business the same size or larger, the same number of people, same number of employees or more. Having that sort of buttressing from above, if you will, is also a really nice hedge. God forbid something goes wrong. That individual, at least on a short-term basis, could help keep the business moving forward.
And so I think to the extent you can really sort of buttress from above and below, you can give yourself the best chance that, God forbid something happens, the business will be okay.