Growing Up Fast: Midmarket Businesses Rethink Their Approach to Growth
ACG’s Operating Partners Summit looked at how to achieve aggressive value creation goals in a challenging market
In turbulent times, business growth tends to take a backseat to survival.
That was the case for plenty of companies during the COVID-19 pandemic. Now, however, the defensive instincts that got them through the crisis have become habits that can interfere with growth.
The “Add-Ons v. Organic Growth” panel at ACG’s virtual Operators’ Summit on Aug. 16 discussed how midmarket businesses are rethinking their approach to growth and ways to balance organic and M&A strategies. John Broderick, operating partner at Argosy Private Equity, moderated the conversation. EPG and Craig Group sponsored the event.
Tighter credit markets, rising interest rates and scarce high-quality targets have shined a light on the importance of organic growth, which Joe McDougall, operating partner at Trive Capital and managing director at TC Operating Partners, said “has been on the back burner for too many companies for far too long.”
As a first step toward reinvigorating growth, particularly for companies that have been in a portfolio for several years, McDougall recommended revisiting the strategic plan, refreshing it and reexamining organic growth opportunities. He also suggested looking at competitors as potential acquisition opportunities.
Evaluating pricing presents another growth lever. A private equity operating partner can help company leaders and sales teams understand the value of a product or service and price it appropriately. “I think it’s easier to get folks enamored around volume—they just get excited about that,” McDougall said. “But I’ll take $1 of price all day of an existing product over some more volume.”
(Organic growth) has been on the back burner for too many companies for far too long.
Trive Capital, TC Operating Partners
Jeff Goodman, senior operating partner at The Riverside Company, noted that consistent and compelling organic growth throughout the holding period drives the best exit outcomes. At Riverside, operating partners begin engaging with a business before the deal closes, he said. They look both for gaps in the information provided, as well as opportunities for future revenue expansion and incremental investment.
The Importance of Being Early
For operating partners, time is of the essence.
Speakers on the first panel titled, “Where the Operating Partner is Spending Time,” said they all get involved with a company that will potentially be acquired in the auction stage. In order to draft and implement a 100-day plan effectively, getting involved after the acquisition closes is too late. “Our 100-day plan starts pretty soon after LOI (letter of intent),” said Travis Dziubla, vice president in operations at Lion Equity. Dziubla, whose firm specializes in corporate carve-outs, said Lion Equity likes to step in early to figure out the strategy of the carve-out, what the standalone company will look like and what management or operational improvements will be needed on day one.
“As soon as we have clarity that we’re going to be buying that company, we’re getting all the pieces in place so we can inject that sense of urgency in a meaningful way on day one,” said Dziubla. If management changes need to be made, the firm has interim executives at the ready, as well as recruiters in their back pocket for any long-term organizational changes.
“We have everything ready to go on day one, so we’re able to hit the ground running and start on our value creation plan,” he said. “If our operations team only got involved after the deal closed, we’re losing a month trying to get all the pieces in place.”
Ben Humphreys, senior operating executive at Monomoy Capital Partners, said his operations team sometimes gets involved even earlier: at the stage of IOIs (indications of interest). “We typically attend management presentations. And we approach as an integrated deal team with less attention to distinctions between the investment team and the operating team,” Humphreys said.
Looking Under the Hood
Regardless of your strategy for add-on acquisitions, you really must have a revenue growth engine underlying the business if you want to build a truly great company and maximize your returns at exit.
The Riverside Company
After closing an investment and as part of the 100-day plan, Riverside’s commercial growth team goes “under the hood” with the CEO and chief revenue officer to assess the organization’s capabilities, including analyzing sales and marketing metrics. Riverside professionals also support the CEO to evaluate talent and identify where upgrades are needed.
Building a solid foundation is critical whether or not the company plans to pursue M&A. “Regardless of your strategy for add-on acquisitions, you really must have a revenue growth engine underlying the business if you want to build a truly great company and maximize your returns at exit,” Goodman said.
As for designing a growth strategy, P4G Capital Partners Managing Director DJ Marshall recommended starting early but being flexible with paths to growth via both organic and M&A strategies. Any add-on investments should be “more than the sum of the two parts,” he noted, while stressing the importance of collaborating with management team members on where they see growth. He advised checking back in on the strategy regularly.
Integrating an add-on acquisition brings with it a host of other challenges. Ed Hine, operating partner at Cold Bore Capital, recommended communicating with the “lowest level of management feasible” and discussing any planned changes, knowing that a deal can spark fear and prompt key personnel to leave. “That’ll help protect what you bought, because human capital is many times a massively important thing in these businesses, particularly in the lower middle market,” he said.
Cutting Through the Noise
Successful growth initiatives require having the right roles and structure within the organization, a topic discussed by the Summit’s “Cutting Through the Noise” panel, moderated by Libby Covington, a partner at Craig Group.
Zorian Rotenberg, operating partner for go-to-market and revenue growth at Charlesbank Capital Partners, began by outlining the role of a chief revenue officer, which extends beyond sales. A former CRO himself, he explained that this role’s “purpose is to drive performance across the entire overall revenue life cycle” and to lead the revenue team.
Although not every company needs a CRO, it’s important to have the right people in the right seats to drive revenue, as well as the right structure for sales and marketing.
Prabhu Soundarrajan, operating partner at Sound Equity Partners, noted that in the best-run businesses that he’s seen, “marketing really owns the P&L, sets the direction and strategy and pricing—all these levers that you need to run that machine—and sales executes.”
Integrating sales and marketing into a commercial engine to drive value should begin on Day 1, he added. “Making that engine work together really drives above-market EBITDA growth.”
Operating partners play a role in helping companies organize their teams effectively, and they can also flag other areas of improvement.
Ellen Kim, operating partner at Rotunda Capital Partners, recalled a portfolio company in the home services category. Integrity was an important value for the business, and the sales group prided itself on not overselling customers. The Rotunda team, however, suspected the company was leaving money on the table and ceding market share to competitors.
As a compromise, the company adopted a “good, better, best” approach, wherein customers would be presented with an array of options to choose from—the basic fix to their immediate problem along with preventive or longer-term upgrades. “We have found remarkable uplift on that, and actually adoption and buy-in from the sales force,” Kim said. The company didn’t have to depart from its values, and the sales team saw a positive response from customers.
Related content: Finding Middle-Market Growth Within the Cloud
NewSpring Capital Operating Partner Kamal Advani underscored the role of an operating partner in adding value. Asked to share advice for peers in his profession, he recommended finding a way to contribute to the business.
“Identify something that’s going to make a difference, something that they (the business) don’t necessarily have the talent in-house to do, and help them get there,” he said. “Bring in the talent if it isn’t you yourself.”
Panelists also discussed the merits of bringing in third-party outsourced providers where appropriate. Sonal Singla, director at Hellman & Friedman, advised companies to seek out specialists who are good at one or a couple of functions. Panelists noted that those who claim to do everything are rarely good at anything. “Focus on doers, rather than providers who make a lot of recommendations and then leave the management team to do it themselves,” Singla added.
Outsourced service providers also need to recognize the growing importance of the operating partner. Dziubla said they need to understand that the operating team has done the due diligence, research and market analysis already and isn’t looking for service providers to repeat that. “There are providers who can dovetail and leverage the work we’ve done, and there are others who insist on recreating the wheel, and we don’t use them,” he said.
Katie Maloney is ACG’s content director, based in Chicago.
Anastasia Donde is Middle Market Growth’s senior editor.
Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.
What’s your M&A outlook for 2024? Take our 5-minute survey.