Some Ways In Which Private Equity Firms Change Businesses They Invest In
All businesses want to grow and one of the ways in which this is achieved is getting investments from private equity companies. The way in which they view the firms they invest in is definitely worth analyzing. It is really important that we analyze this because it can change many different things in companies that are struggling. Matias Campiani mentions some ways in which the private equity firms change the businesses they invest in with the purpose of helping those interested to receive investments.
Changing Budgeting Mindset
Private equity firms analyze the assumptions made in the last year and re-set the entire discussion with the purpose of changing how the dollars in the budgets are used, all while creating a cost management culture.
In many situations we see private equity firms using ZBB (zero-based-budgeting), which is a tool that looks for highly efficient returns on spending made. The goal is to find costs drivers and properly categorize them as suitable, ranging between “must have” to “nice to have”. The idea is to basically remove as many expenses labeled “nice to have” as possible.
Cash Generation Urgency
Something like this can only start with a proper management of payable and receivable accounts, together with inventory optimization. The corporate mindset that is created is based on stopping the managers from trying to prove anything and to get them to actively think about how to increase cash generation. Cash generation urgency also makes people understand the fact that even small spending can be completely unnecessary and would reduce profits.
Creating Long-Term Value
The private equity firms create and implement strategies that position companies for a true long-term profitability and growth. This does involve making various judicious choices like eliminating the low-value activities as soon as possible and investing in really high-potential ideas that would create true core value.
Basically, these are firms that look at the companies they invest in with complete objectivity. The idea is always to identify where the highest growth potential is and how it can be captured. There need to be decisions made in regards to what will be stopped and what will be started.
Everything Is Done Faster
Many argue that one of the biggest disadvantages of having private equity firms invest in smaller companies is that everything is done a lot faster than workers can deal with. The entire private equity world is focused on action. Time is seen as a highly critical asset that needs to be properly used in order to make smart growth decisions. However, this does not mean that things are sped up when it is impossible to do so. Private equity firms change how fast businesses operate but when done properly, this is a huge advantage that should be properly utilized.
Setting Realistic Goals
One of the huge problems with most companies out there is that they have goals that are simply not realistic. This is not the case with private equity firms. The goals that they set are aggressive but they are 100% realistic. Such an approach is highly lucrative as it helps achieve a natural and actually attainable growth.