How do we stop you backing the wrong business?

| 24 January 2024

It is perhaps fair to acknowledge that for the last 2 or 3 years, typical indicators and models relied upon to value businesses have taken a back seat. Given relentless market turmoil and recent uncertainty, past financial performances (good or bad) will, for obvious reasons, be misleading and in almost all cases deemed inadmissible in the context of valuation.

In this latest piece, Richard Lindsay shares insight into the 4 key actions to ensure your backing the right business. 

Whilst any business would be delighted to report (no matter how small) an EBITDA figure on the right side of the line, it is nevertheless not the reflective figure that an organisation’s leadership would wish a low-ball multiple to be applied.

Undeniably, investing private capital used to be a lot easier, much cheaper and the rules were rather straight forward… the brave, intrepid fish that swim in the distressed-waters will acquire for less but face a gamble on growth. Conversely, those coy Koi seeking a sure thing would invariably pay more but might sleep better at night in the beginning.

Today, the cancer of higher-priced debt and the risk of longer hold times is in every nook and cranny. The last 3 years opened our eyes fully to the fact that commercial, financial, political, ecological and of course medical vulnerabilities can bring humanity to its knees and change the world over night. We’ve also learned that companies like Hertz, Virgin Atlantic, Brooks Brothers can be fine one minute and then either bust or in admin/Chapter 11 the next.

The signposting on low multiples and low valuations used to mean high risk and ‘not for the faint hearted’. Today, while they still spell hard work with lower stakes, the gamble, ironically, presents lower risk. In contrast, high-priced, strong performing businesses with all the hallmarks of stability on the surface, have the potential of becoming very big and expensive mistakes if one can’t see what life-altering global event might exist around the corner. In current market conditions it might serve us well to remember that distress doesn’t necessarily mean broken. Running out of money because it’s been spent on heavy lifting in building sustainability, scalability, and future-proofed technology, will just mean that investors won’t require large capital provisions.

All this highlights the need for you to review your deal thesis and assess your leadership against this new landscape.

However all is not lost, debt markets will recover over time and true, dependable, BAU business-performance will once again be revealed, controlling what can be controlled and reviewing investment strategies are with a current market lens is the best coarse.

So… what can be done, what considerations and next steps should PE firms and portco leaders have on their agenda? Below we’ve highlighted 4 actions:

  1. Review your robust value-creation strategy in advance, ensuring that every part is to be delivered by the right leadership. The true value sits with PE-experienced transformation experts that are incredibly well rehearsed and experienced in delivering change relative to their field of expertise. Revise number and identify where the growth will come from in our current climate. Revisiting your deal thesis and aligning the leadership skillset required to deliver each aspect. Will you need additional firepower in functions that are now lacking ballast?
  2. Consider significant emphasis on market intelligence and Human Capital Due Diligence. People are your game-changers and in equal measure can either take you on the road to growth or on the road to distress. It is vital you know which you’re on. Assess your inherited talent properly, along with a complete scope of the market. Who is a flight-risk? How fragile is your wider talent pool? How strong is the culture you are buying? PE firms and portcos are notoriously more equipped at knowing who their key players are than they are at identifying or preparing successors. Undertaking market intelligence, utilising experienced consultants on a project basis and developing plans that take succession into account are all crucial.
  3. “Change” is a serious business and needs dedicated management of it. Don’t arrive at a place when execution isn’t happening, The barriers around change should be identified very early on in the due diligence process and mitigated post-transaction by leadership with that skillset. As long as it conforms to the investment thesis, focus on what matters most to skilled talent, gravitate to prioritising those and do them first.
  4. Continue to assess and coach your leaders on an ongoing basis. Assessing ensures that those leading your investment continue to be engaged and aligned to value creation but are also properly equipped to deliver it. For example, do you need an efficiency type or a digital transformation type within specific roles, do you have the right blend of clinical cost cutters and imaginative innovators? Some will not be cut out for it, some never will, but some with the right coaching can be superstars. For the right individuals coaching is empowering and a whole lot cheaper and less disruptive than dismissals and replacements.


You can learn more about our how we’re helping PE firms with their people strategy or if you’d like to speak to one of our consultants, please contact us.



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