How to Maximize ROI After Buying a Company

With increasing competition and heightened multiples commonly seen in today’s mergers and acquisitions (M&A) market, some private equity firms and strategic investors have opted for less aggressive due diligence in hopes of reducing the hurdles to closing the deal. But how can investors maximize their return on investment (ROI) and ensure they are increasing the value of the operating companies in which they’ve invested?

This question was a topic at the Association for Corporate Growth’s recent New York chapter event on value creation, where the panel discussion centered on utilizing operational improvements as a way to create value. Industry experts from a variety of backgrounds – technology, consulting, human resources and more – were in agreement that each company and investment faces different operational challenges and must be approached situationally not only to better identify areas for improvement, but also to leverage the key factors that will help the company outperform the competition. One way investors can do this is by utilizing experienced consultants, who can ask the right questions, administer testing, develop mapping and observations, and conduct conversations with key stakeholders.

Investors can – and should, when appropriate – use data to help them identify areas for improvement. Companies in the lower middle market may have less sophisticated data than those in upper tiers, so doing deeper dives into the supporting components of operations, such as IT and processes, is critical to gaining a better understanding of the operating business. A third party can help collect, refine and draw insights from the financial, organizational and operational performance of a company, benchmarking it against the rest of the market to identify areas for improvements and efficiencies. At this point, key performance indicators can be refined to improve measurements and progress toward goals and to monitor areas that have been identified for efficiency improvements.

During due diligence, private equity firms like to look at internal controls and financial reporting, but it is often hard to assess the behind-the-scenes processes. One way of diving deeper is by having conversations with stakeholders, including management personnel and key staff members who are closely involved with specific operations. This can help unveil the true state of the business since stakeholders can often help identify pain points, provide context and explain the strategic plan for the company. Having candid conversations with management regarding their pain points and their plans for future growth has led to discussions where we have identified operational efficiencies and have devised new and different ways to maximize growth.

Analyzing data to determine gaps and utilizing input from management can help identify several areas for increased operational efficiencies. At this point, solutions should be presented in terms of a cost-benefit analysis, identifying what it will cost and how it will benefit the company. From there, a company can choose the solution – or solutions – that will then create a strategic plan for how they will maximize efficiency and ROI.

It is important to note that these decisions must be made with the future in mind. For example, rolling out a sophisticated and complex technology software system will likely not be beneficial if the company is planning to sell in the next few years. This is where a consultant can help. Consultants can help ensure these decisions align with the long-term vision for the company and can also help alleviate any tension between the acquiring private equity firm and the existing management. Beyond that, consultants can equip the private equity firm and the leadership of the operating business with the skills and knowledge they need to successfully execute the strategy and to increase revenue growth and ROI. If you need assistance identifying opportunities for operational efficiencies at your operating company, our experienced consultants at KSM would be happy to help.