What I Learned From Private Equity (And How Entrepreneurs Can Apply It)

Primarily for: Entrepreneurial Founders, Venture Investors

TL;DR

Growing companies can learn from the most common strategies PE firms employ once they

invest:

1. Pursue targeted follow-on acquisitions – not recommended for most independent companies

2. Upgrade finance and accounting – worth doing in anticipation of growth

3. Professionalize and enhance the sales function – the big opportunity for entrepreneurs

As an entrepreneur, I was intrigued by private equity firms that bought companies like mine — already profitable and growing — usually retained the management team and somehow grew them faster despite not knowing the market deeply. How did they do that?

I wanted to find out before selling my company so I could benefit from their approach. I was

fortunate to be invited onto a PE advisory board, which gave me an inside look. Later I served on the board of a PE-owned firm that bought my company where I learned even more. It turned out PE uses three common strategies to accelerate growth in already successful companies, but each one has different implications for entrepreneurs. Here’s what I learned, in increasing order of opportunity.

Strategic Acquisitions: Resist This Temptation

PE firms frequently pursue follow-on acquisitions to accelerate growth. When they work, they

can:

• Accelerate revenue growth beyond what’s possible organically

• Enhance strategic capabilities, product diversity, and geographic reach

• Create synergies and add valuable staff

  
  

All that said, buying and integrating companies is challenging. Most founders fail the first few times they try it. I saw one acquisition where once the purchase went through the founder left (with many clients following him), despite generous stock options. In another instance the strategic fit was good but the integration of two different cultures operating in distant cities was flubbed and much value was destroyed.

PE firms typically have deep experience with acquisitions and a much higher success rate than founders. That’s why I warn entrepreneurs against acquisitions unless the opportunity is simply too good to ignore. Better to focus on organic growth and strategic partnerships until you have the scale and expertise to beat the high M&A failure rate. Anything worth buying will be expensive – and doubly so if the acquisition fails.

Upgrade Financial Systems: Learn From My Mistakes

PE firms usually enhance financial reporting in companies they buy so they can better manage growth and avoid surprises. That benefits them, but entrepreneurs should consider greater investments in these systems too. Many founders skimp on financial and accounting staff and live to regret it. I learned this lesson the expensive way. Specifically:

• I didn’t sufficiently understand the relative profitability of various product lines, leading to mis-calibrated investments

• Poor record-keeping made it difficult to claim deductions we probably were entitled to

• Our inability to keep up with rapid growth led to expensive cleanup efforts (prevention is much cheaper than cure!)

  
  

Worst of all was our fumbling of state taxes. Our products were complex and relevant state

sales tax laws were changing rapidly. We failed to charge sales tax and had a large subsequent liability that included interest and penalties. Had we gotten this right initially our cost would have been zero: Sales taxes are paid by customers, not suppliers. But we couldn’t bill customers years later.

The lesson: Hire appropriate finance and accounting staff ahead of growth, not based on your current needs, and make sure they’re as talented as the rest of your team.

Professionalize the Sales Function: The Real Opportunity for Entrepreneurs

Most founders are passionate about their products but lack sales experience. Rarely do small to mid-sized businesses have a top-notch sales operation. That’s unfortunate, since selling capability directly impacts survival and growth. Any increase in sales effectiveness drops faster to the bottom line than improvement in product development or administrative activities, so the ROI for improving the sales function is large and fast. That’s why PE firms look here first.

I realized this and worked hard to improve my company’s selling capability. We hired lead

generators and other sales support staff to maximize the time our senior sellers spent with

customers. We brought in sales consultants to assess our activities and make

recommendations, including measuring progress through achievement of explicitly defined sales advances. We invested in software, selling systems, and training to ensure that our team was identifying and consistently using the best processes and techniques to sell our products. The training required taking our sellers out of the field and flying them across the country, but the investment was worth it.

We didn’t do all of this perfectly but the activities really helped. One of the most effective

practices we used was direct feedback. Following important client meetings and during regular role plays we used a feedback form (see sample here) based on the sales practices we found to be most effective. For example, we’d assess the talk/listen balance, whether the seller probed for budget and decision-making authority, and if the seller obtained specific next steps. It provided insight for me into their skills, the obstacles they encountered, and best sales practices. Everyone improved from it. Today when I work with elite athletes and soldiers I’m struck by the parallels: they drill constantly and receive immediate feedback. The best sales operations do the same.

When I worked with PE firms I saw that they took things even further, including:

• Disciplined CRM use and ongoing efforts to improve predictive accuracy

• Rigorous definitions and measurement of sales progress by stage

• Analysis of sales wins and losses by reasons for success/failure, new vs. repeat customers, and competitors, all sorted by size of sale. One detailed analysis found that we were losing large deals due to perceived lack of expertise versus competitors. We began pairing product experts with sellers for key meetings, and our win rate on six-figure deals increased.

• Competitor analysis based on independent third-party comparisons

• Detailed financial analysis to determine optimal ratios of lead generators to sellers

Bottom line: Most young companies have underdeveloped sales operations. Improving them typically delivers the highest and fastest ROI.

Pull the Levers Before You Sell

I joined that advisory board hoping to learn the private equity growth strategies before selling my company. It worked. I stayed away from acquisitions and though I underinvested in my finance function I doubled down on sales operations. That paid off handsomely, accelerating growth while I ran the company and increasing valuation when I sold it – to a PE firm.

Try This Week

• Audit your sales process: Use an internal or external advisor to assess your selling

  system. Which areas are actively holding you back? What practices mentioned in this

  post or elsewhere could enhance your results? Make rough estimates of how much your

  sales might increase if improved in any of these ways and what the return might be.

• Adapt the Sales Feedback Form for your sales calls: Meet with your most successful

  seller to go over your sales process step by step. Use that conversation to identify which

  elements of each sales call matter most, then create/adapt the sample form to track

  them. Extra credit if you try it out following a real or practice sales call using an observer.