Private Equity Roll Up Strategies — Accelerated Value Creation Through Data and Analytics
Private equity firms have a major challenge when executing roll up strategies in their investment sectors. Rolling up multiple acquisitions creates an information and reporting nightmare. How do the PE firms and their operating C suite teams quickly get basic financial reporting from each acquisition and how can they get consolidated financial information across the newly built enterprise? And once basic financial reporting is in place, how do they accelerate financial and operating transformation finding cash flow enhancement and EBITDA improvement opportunities?
The Challenge: As Your Roll up Deals Close, Your Financial Data Sources Grow Exponentially, and Your Ability to Produce Accurate Financial Reports Becomes Extremely Difficult and Time Consuming.
As deals in the acquisition roll up pipeline begin to close, there is typically a proliferation of information management systems from each of the newly acquired companies. As the number of information systems mounts, it becomes increasingly difficult to produce good financial reports. Typically, this results in a manual financial consolidation process which requires each acquisition to submit their statements and then the PE team must manually consolidate. A very difficult and time consuming process at a point in time that is extremely critical for the deal.
With this newly acquired “Tower of Financial Babel”, PE firms and their operators are looking to accelerate profit improvement and value creation. However, they are usually trying to make management and value transformation decisions while sorting through a legion of information management systems with different charts of accounts, conflicting formats, and diverse accounting policies. In order to deal with this mounting incremental complexity, the deal accounting team must try to reconcile these different statements frequently requiring multiple conversations with each of the acquired company’s executive teams. In turn, this takes away valuable time needed by each of the executive leadership teams to manage their company and create value.
The reality is that the financial consolidation process for the typical PE roll up becomes highly complex, very manual, and very slow. As more roll up deals are completed and added on to the enterprise, this problem only gets worse and more fragmented. And given this difficult process, the consolidated statements are often delayed and even become suspect as the potential for reporting errors increases with process complexity.
Those are just the basics. From there, incremental value creation and financial transformation is extremely difficult. How can the PE firms quickly begin the financial and operating transformation that needs to take place? Specifically, how does the typical PE firm identify the EBITDA improvement opportunities as well as the cash flow harvesting that needs to take place across the new and expanding acquired enterprise?
The first thought might be to merge all of the new acquisitions onto one of the incumbent systems. However, these types of large-scale ERP migrations projects are very risky and prone to failure, more often than not running late and way over budget. And they are incredibly disruptive to location operating management who are also integrating into the new ownership structure as well as trying to improve operations and financial results. Therefore, it is easy to see why migrating each new acquisition from the deal pipeline onto a new ERP, EMR, or any other centralized management platform is difficult, complex, expensive, and disruptive to the new deal at a time when the new acquisition is vulnerable. PE firms want their operating teams focused on execution, operations, and financial performance — especially when the roll up strategy is in the initial stages.
Worst of all — the PE and the executive teams could possibly be integrating onto an existing enterprise information management system that may be sub-optimal for the new larger, consolidated company. This type of process will most likely create short, medium, and long term management issues which will surely be recognized in the future during the deal exit process.
Instead of migrating onto an incumbent system — why not take a long-term approach by developing a true data driven strategy? Take time to develop a holistic view of the new enterprise and be deliberate when devising and implementing a new enterprise management system. This enterprise view will allow the roll up to find and implement the market leading systems creating the ultimate strategic competitive advantage for the future state company. And this data strategy can be developed quickly — often in a matter of a few weeks.
Then how does the PE firm and the roll up operating executive team quickly get the financial information needed to run and manage the company and begin the financial/operational transformation?
The best way to accomplish these goals with minimal operating company disruption on a relatively short timeline is to merge the portfolio companies on a data basis. Pull each of the portfolio company’s sources of data (ERP, CRM, EMR, auxiliary systems, social media, IoT, third party, etc.) into a consolidated data warehouse. Then integrate the companies on a virtual basis designing and implementing a powerful data model to enable the consolidation.
Once the data warehouse and the consolidated data model is in place, standardized single-source-of-truth finance and operating statement dashboards will be in place. These dashboards will be on a near real-time basis for PE management, their lenders, the executive management team, local operating managers, and employees. These dashboard reports will enable self-service analytics allowing for a much deeper understanding of portfolio company performance and efficient operational reviews and conversations.
With the dashboards in place, the complete team can focus on value identification and creation with standardized KPIs (e.g., EBITDA, operating metrics, cash flow, etc.). Dashboards can be designed and built to benchmark across the portfolio companies and also up against best industry practice. Value trend lines be measured as well as identification of best case or lagging performers. Specific areas of performance can be targeted (e.g., A/R, inventory, fixed asset utilization, labor efficiency, etc.) again comparing performance and finding sources of cash flow improvement. With this tremendous analytics and insight, best practices can be identified and action plans can be created to implement across the new enterprise. Conversely, remediation action plans can put in place for lagging performers with improvement monitored and scorecarded.
Building and implementing an enterprise data warehouse and business intelligence dashboards creates an asset of true incremental value. With all enterprise data consolidated and modeled, this will open up opportunities for predictive analytics, data science, and deep value discovery. New marketing analytics strategies can be put in place. New products and services can be imagined and developed through data science ROI use cases. Optimization opportunities will be found, analyzed, and implemented. And so on as the operating teams become data savvy.
In summary, the quickest and most effective way to affect a PE financial and operating transformation for a roll up is to integrate at the data level. This data integration, consisting of a data warehouse and targeted financial and operating dashboards, will accelerate the value creation deal process. In turn, this will maximize the financial ROI of the deal generating the greatest return for the investment firm and their fund investors.
Originally published at https://aptitive.com on July 14, 2020.
