Transforming the Finance Function of Private Equity Portfolio Companies

When it comes to transforming the finance function of a private equity firm’s portfolio company, the process can be compared to renovating a house. Similar to how one can quickly update appliances and address minor issues in a new home, there are immediate improvements that can be made post-acquisition. However, more complex projects will require a longer timeline for resolution.

During the due diligence process and in the period leading up to the transaction, it is imperative to identify both immediate wins and long-term objectives. According to Richard Sittema, a principal at Grant Thornton, newly acquired portfolio companies often require immediate fixes in basic accounting and reporting functions, technological adjustments, cybersecurity enhancements, changes in leadership, and the implementation of margin-lift opportunities.

Such improvements are essential to ensure that the acquired company’s finance function aligns with the 100-day plan. However, there may be other critical weaknesses in processes and systems that require longer-term solutions. In this case, the focus should be on identifying changes in people, processes, and technology that must be addressed within the first 100 days, while larger transformation initiatives are planned.

To initiate the transformation, PE buyers often conduct a rapid diagnostic analysis to assess a target’s finance capabilities and identify areas of opportunity, obstacles to synergies, risks, and potential mitigation plans. This diagnostic aims to enable four key goals for the finance function: P&L transparency, balance sheet accuracy, cash flow visibility, and value alignment in success criteria, KPIs, budget, and incentives.

Mike Hennessey, a Principal at Grant Thornton, emphasizes the importance of maximizing the value of a PE investment by optimizing the finance function to provide insights into P&L and cash flow, allowing for better liquidity management and operational efficiencies.

Regarding technology, simplicity is key when it comes to making system changes within the first 100 days. PE leaders should prioritize maintaining basic systems and addressing any major control gaps to effectively manage risks. Simple automation and efficiencies can be introduced, but major ERP system upgrades should be avoided, especially if the portfolio company is set for an exit in the near term.

Ultimately, creating a finance function that manages risks effectively and streamlines processes within the first few months post-acquisition is crucial for delivering a high multiple a few years down the road. The immediate improvements made within the first 100 days set the stage for more substantial renovations that can be assessed later on. By planning appropriately for both short-term and long-term objectives, PE firms increase their chances of turning their newly acquired companies into valuable assets.