March 17, 2017
Interviewed by: David Snow
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Moving From Diligence to Action Plan

Midsized, growing companies acquired by private equity firms often have unsophisticated data capabilities, which represents a major value-add opportunity, according to three private equity experts. They also discuss how they get management buy-in for value-creation plans, as well as the fatigue that often sets in following a lengthy due diligence process.

Midsized, growing companies acquired by private equity firms often have unsophisticated data capabilities, which represents a major value-add opportunity, according to three private equity experts. They also discuss how they get management buy-in for value-creation plans, as well as the fatigue that often sets in following a lengthy due diligence process.

From Diligence to Plan of Action
The Data-Driven CFO

David Snow, Privcap:
Today, we’re joined by Shahriyar Rahmati of Comvest Partners, Dave Noonan of RSM and Kevin Masse of TA Associates. Gentlemen, welcome to Privcap. Thanks for being here.

Unison: Thank you.

Snow: Let’s talk about how the private equity firm partners with the management team of the portfolio companies to come up with a plan of value creation. The part of the plan that involves the CFO, and his or her access to data, is an area of focus for us. Shahriyar, for your firm—Comvest Partners—and the kinds of companies that you invest in, what does the CFO or finance function typically look like by way of access to data, leveraging data before you invest? What goes through your head as far as, “Hmm, what can we do to help these guys get to the next level?”

Shahriyar Rahmati, Comvest Partners:
In the majority of cases, Step 1 is just a bit of a traditional gap analysis. It’s figuring out what do they do today? How effective is it? Does it give them what they need? A lot of that, you’re teasing out through the diligence process as well and starting to get a sense for how easy is it for them to produce certain data requests that are relating to performance questions around the business? How good of a handle do they have on customer profitability, etc.?

Then, looking at what they actually need. What are the key levers in the business? What does our investment thesis hinge upon? And how do we work backwards with management from that investment thesis to the few very key levers that the management team needs lots of insight and visibility around? It’s usually connecting those that gives us a framework that we drive to over time with that management team.

Snow: Dave, as someone who’s done a lot of due diligence, for a private equity investment in typically a growing or growth-stage company, when you get to the role of the CFO and their ability to harness data, what do you typically look at?

Dave Noonan, RSM US LLP:
In terms of looking at how systems are architected when they’re in the diligence phase, to Shahriyar’s point, they’re all over the board. Typically, they’re not very sophisticated; they’re disjointed, in a lot of cases. Over time, businesses add on third-party applications to solve point needs in the business and those become difficult to integrate and to harness data from. So, once the deal closes, we get into a deeper assessment phase and come up with a road map that lists out both what the solutions could be to close the gaps to meet the investment thesis and then, a budget and timeline to execute against that. You do an ROI analysis on that and you decide whether that’s worth going after.

Kevin Masse, TA Associates:
What’s interesting—and I remind my colleagues of this all the time and we remind our CFOs of this—is that we just completed diligence. We just saw you at prime time, right? You just went through. We had folks like Dave’s team come out and complete their diligence. We did a ton of financial and commercial diligence. We just shined a spotlight on this business for the last five to eight or 10 weeks of diligence. So, we know the strengths. We developed a hypothesis.

Rahmati: The deal closes and in comes the private equity firm, resources ablaze, energy there, capital invested and ready to go. And what are they? Tired, right? If you think about all the different initiatives that we’re trying to execute—whether it’s a plant reconfiguration, investment in new products, a commercial enhancement or enablement of new strategies—invariably, all of those come back and touch the finance team. And a lot of them rest on IT as well.

One of the arts and necessities of our roles is to find all the things that layer and stack on top of these couple of foundational functions within the business and to not kill them because the risk management element of this is huge.

Masse: We’re coming into it full of energy and excitement and enthusiasm. And we are very sensitive to the fact that we just potentially exhausted our management team for a period of time.

One best practice we’ve used that actually has been pretty helpful is during the on-boarding process, we actually acknowledge—that was a great point—particularly for our CFOs, the process. [We acknowledge] what they went through and we encourage them to reflect on it because that’s going to help inform them of their perspective on what they need to do within their team, systems, process, workflows, whatever it may be. If they take a moment to focus on it, they can actually do the self-assessment pretty darn well. And we build on that to help develop our 180.

Snow: Maybe the first 7 days of the 180-day plan should include a forced vacation for the entire finance team. Just keep that in mind.

Masse: Yes. Maybe a half a day.

Snow: Let’s talk more about the way the plan gets developed, because typically the value-creation plan for a private equity firm investment will have a number of different levers to it. Specifically with regard to the finance function and the CFO team, how do you develop that with them? How do you get buy-in? Do you ever see any resistance?

Masse: As it relates specifically to the finance function, that reflection period that I mentioned earlier—we ask our CFOs to consider that and to help tease along the discussion. We share with them copies of our diligence reports. So, when our accounting and IT and tax advisors prepare diligence reports, we share those with the CFOs. We’re very candid. We give them feedback on what we saw during the diligence, again, to prep for them when they go through this again upon time of exit. Then, we ask them to do an assessment on their business—strengths, weaknesses—and what are the areas from a technology, team and workflow perspective that need to be addressed? Then, we go through an effort to prioritize all of that.

Snow: So, it’s very much collaborative. It’s not the private equity guys marching in and saying, “Here’s your plan.”

Masse: I think every firm has their own approach. Our approach that’s worked really well for four-plus decades at TA is one where we collaborate with our teams. We’re not prescriptive.

Noonan: In working with a number of firms across the country, the level of involvement and how prescriptive you are with those 180-day plans and with the strategies and investment thesis—it varies. There’s a spectrum of command and control that goes from laissez-faire to deeply engaged.

Rahmati: Sometimes, management teams haven’t gone through 20, 30, 50 or 100 transactions over the course of their career. It’s a bit less common for them to do a number of these things than it is for us. So, we have the benefit of the reps of execution to come in there and give them our thoughts and provide what a general framework and structure could look like and, with them, help to fill it in. It needs to be theirs for them to feel the ownership and passion to accomplish it, because a lot of it is really hard work. If they don’t really understand the why behind the what, it’s difficult for them to get invigorated around that.

If you think about something as simple as debt, a lot of the companies we buy in family-owned businesses were relatively low-leverage, cash-rich businesses. And we apply an appropriate amount of leverage to those businesses post-transaction. Well, they’ll include one or two tiers of debt, sometimes a revolver, a different reporting requirement, all of these covenants or a definition of EBITDA that they have absolutely no understanding or awareness of necessarily. It doesn’t really conform to any version of gap out of the gate on a transaction, typically. So, we go to them bearing gifts and basically condensing that 163-page credit agreement into the five to 10 pages that really matter and we walk them through that.

Masse: We actually show them, “Remember all that analysis, this episodic, ad-hoc request we made through that eight-week diligence process where we looked at retention rates differently than you did? We looked at a cohort analysis in a way that you’ve never done it before.”

“We looked at pricing. We’ve looked at your customer base five different ways. The reason why we looked at it that way is because we believed it was very important to really understand the drivers of your business. Guess what’s going to happen at your first board meeting? You’re going to get asked these same questions.”

Noonan: When you guys are on-boarding these folks, you don’t give them less work to do necessarily, right? So, in order to get to some of this analytic data and have the systems in place to create those board reports even right out of the gate, they may need some help—some arms and legs—to help them get that done.

Masse: And that’s where the technology piece becomes important, right?

Noonan: Exactly.

Masse: How often have you looked at a business that’s using a QuickBooks or an older version of an ERP? Everything is done in Excel and we’re now using tools that create systematized reporting, real-time transactional level data, visibility and lots of BI analysis. That’s where things have changed certainly in the last half-decade.

Noonan: Which adds dramatically to the enterprise value of the asset at the end of the day, having that rigor in place.

Rahmati: And it has become less expensive.

Masse: Without a doubt.

Rahmati: Which is a really nice thing; 10 or 15 years ago, you had to step out and spend seven figures on even a middleware platform to tie together some databases. Today, you have these beautiful visualizations on available-anywhere, web-based platforms that can link into all kinds of databases and make it relatively easy to grab those disparate systems’ information and pull it together. And it’s something that everybody can see.

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