Financial Changes You Should Expect
After You’ve Sold to Private Equity Investors
Change towards success
- Changes In Your Financial Function
- Stable and Reccuring Cashflow
- Sophisticated Financial Systems
Thinking about selling your business to a private equity firm? There’s never been a better time. The private equity industry has nearly tripled over the past ten years, and 2021 has seen record-breaking deals both in the U.S. and around the globe.
But that doesn’t mean the process is all celebration and champagne. Selling is hard work, and it doesn’t stop once the deal is closed.
Any founder or CFO who has been through a private equity sale will tell you the same thing: They thought the hardest thing they had ever done was to get the deal across the finish line. And boy, were they right. Until the next day. Life gets even harder after the sale.
Hang on. Harder?
That’s right. Things get more complicated and labor-intensive in the first six months after the deal is closed (sorry to burst your bubble). Here’s why.
Private equity investors are looking to yield high returns quickly, and that means they want to see consistent high growth, market advantage, financial rigor, and stable cash flow. They want numbers and lots of them. Many founder-led companies do not have the depth of financial leadership experience to navigate this new terrain and deliver on these newfound financial demands.
Will Ask About Your Business
When you’re dealing with messy data or lack of data, you can’t quickly and definitely answer the most important questions investors are asking. This leaves you unprepared for curveballs like:
- Do you have enough cash on hand to cover increased expenditures associated with growth?
- What happens if you lose an anchor client?
- How will hiring new people affect your cash flow?
- Can you support an expansion or other growth investment?
- What happens when a worldwide pandemic permanently alters your business model?
In the early growth stages, it may be possible to drop back and punt when these issues crop up. But when you are playing with someone else’s money, there’s a higher level of transparency and visibility needed. Private equity investors will want to see a clear picture of your cash and your financial trajectory, and that requires a more refined financial model that guides the decision-making process.
What Private Equity Investors
Expect in Your Financial Function
When you are in the early stages following a private equity sale, creating the expected level of financial transparency and complexity is a big shift. If you don’t understand it well, it can be a grueling, turbulent process. You may need to implement new systems, new team members, more complex financial structures, and better reporting processes, all for the purpose of providing high-caliber financial information to investors.
Here’s What Private Equity
Investors Will be Looking For
Strong Financial Leadership
Investors need to know that your company has a strong hand on the financial helm. This starts with a CFO who can provide financial strategy, manage cash flow, work efficiently within a finite budget, drive top-line revenue growth, develop accurate financial forecasts, and ensure strong ROI. The CFO should also be able to build out and lead a team of capable financial players to manage day-to-day financial functions: controller, treasurer, analysts, tax accountants, general accountants, etc.
Financial visibility is key to ensuring consistent growth and healthy profit margins. Investors will require loads of new reports, with very tight deadlines as well as changes in style and scope.
These will include:
- Month-end reporting packages
- Regular forecast updates
- Sales flash reports
- Cash flow projections KPI Reports
- Financial and Operating
and the list keeps going.
Stable, Recurring Cash Flow
Top-line revenue is important, but it doesn’t mean anything if you don’t have ample cash on hand to cover expenses. That’s especially important as you begin to scale since growth requires you to spend money upfront. That’s why investors will want to see a detailed 13-week cash flow plan that includes cash inflows and outflows, projections, and weekly statements.
Sophisticated Financial Systems
Most founders need to upgrade their technology to handle the increased level of financial sophistication and data accessibility expected by the PE firm. This might include investing in a new ERP, implementing a SaaS fintech solution, and incorporating more advanced business intelligence tools and dashboards. In addition to the technology side, you’ll also need to standardize and automate processes to improve efficiency and accuracy.
Level Up Your Finances
Without Losing Your Mind
What if you didn’t have to wait until you sell? Well then, maybe that Day 1 after closing the deal wouldn’t be quite so hard.
It takes a tremendous amount of work to evolve your business beyond its current level of sophistication. PE firms demand high-caliber information because their goal is to grow the profitability of the business and yield high returns on their investment. But founders may not have the capability to get all these things done internally.
That’s why we recommend working with a consulting firm like CFO Alliance. We are your team of financial A-players, partnering with you to provide the financial leadership, structure, and execution you need to avoid deal-breaking financial surprises.
PE firms want great information and they want it now. We make that possible. Give us a call to find out how we can support you through your deal from start to finish.
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