PE finance transformation objectives for the first 100 days

Rapid diagnosis and improvements deliver substantial value

Editor’s note: This is one of three stories in a series on how PE firms can build value immediately after an acquisition. In addition to this article on finance modernization, see our stories on optimizing operations and human capital management. 

Transforming a private equity portfolio company’s finance function after a transaction is much like renovating a house when you’ve bought a fixer-upper.

In the initial 100 days, you might be able to install new appliances, paint a room in need of a new look, and even replace a furnace that’s not working correctly. However, more complex projects in the overhaul — such as a new addition or a kitchen remodeling — require longer time frames.

During due diligence and the days leading up to the transaction, it’s useful to divide your objectives between the people, processes and systems that can be upgraded quickly and those that will take longer to resolve.

“I’ve seen new portfolio companies borrow an accounting manager from another portfolio company for three months to get everything working right,” said Grant Thornton Transaction Advisory Principal Richard Sittema. “They come in without any accounting policies, without anybody that can do a balance sheet reconciliation. They get that all fixed in the first week.”

Improvements in the finance function that typically are made right away include:

• Shoring up basic accounting and reporting functions and controls, making sure that the appropriate data will be available with the frequency and accuracy expected from all the PE firm’s portfolio companies.
• Adjusting technology so the acquired company can operate effectively on the underlying transactional systems and properly report financial information and KPIs to the new PE buyer.
• Plugging dangerous gaps in cybersecurity protections and other control deficiencies.
• Changes in leadership and personnel.
• Implementing immediate margin-lift opportunities identified during diligence, which can mean cost takeout but also price increases where possible.

4 goals for a target’s finance function

A rapid diagnostic analysis can help the PE buyer assess the finance function’s maturity. PE firms often seek a third party to assess a target’s finance capabilities, pinpoint areas of opportunity and obstacles to synergies, identify desired characteristics for integrated finance operations, and describe potential risks and mitigation plans.

The timing of such an analysis can vary depending on when both organizations can comfortably share their information with one another and the third party. Whenever the diagnosis occurs, it is undertaken with the objective of enabling four key goals for the newly updated finance function:

• P&L transparency
• Balance sheet accuracy
• Cash flow visibility
• Value alignment in success criteria, KPIs, budget and incentives

These goals seem simple, but often they’re beyond the sophistication of an acquisition target.

Technology: Band-aids are OK

Simplicity often is a key factor when PE leaders are deciding on systems changes that may be necessary in the first 100 days.

PE firms that fully understand the portfolio company’s reporting package can determine during the diligence process what information and data the acquired company’s systems will provide them. If there are gaps in the system, a third party or an IT director at one of the fund’s other portfolio companies can be brought in to make the necessary adjustments as soon as the close is complete.

“If I’m not getting the segment reporting that I need or I’m not getting the profitability data by product, customer and geography that I need from the systems, I have to change that immediately,” Sittema said. “You identify the data that you need to effectively run the business, and if the system can’t give you that, you have to make changes immediately.”

PE leaders generally try to stick to basic systems changes, though, because of compatibility issues. It makes little sense to fund huge ERP system upgrades at a portfolio company that:

• You’re planning to exit in the near term; and
• Already possesses underlying transactional systems that meet the needs of the business.

Start with the data and reporting layers, and perhaps introduce simple automation and efficiencies within the organization that will easily translate to other companies that get added to the platform. But keep in mind that, for example, a services company that’s adding a manufacturing layer might not have manufacturing resource planning capabilities.