Most private equity firms at least lip-service some version of a 100-day plan when closing the investment transaction in a new portfolio company. Given the long list of post-closing action items, the effort makes sense. Still, does the 100-day plan really create value? Not likely. However, the 100-day plan mitigates the risk, so write this down to a good defense.
Defense can prevent teams from losing the game, offense scores the points that win the game. This reality should shift the leadership’s focus toward strategic planning. But wait a minute! Doesn’t the investment thesis cover the strategy? Of course, but the investment thesis does not “operationalize” the strategy. The strategy is only vindicated when it generates accelerated earnings before interest, taxes, depreciation and amortization growth (EBITDA). The “operationalization” strategy (the investment thesis) is tactical and should be owned by the portfolio company’s leadership team. Middle Market Methods suggests a planning session for the benefit of the portfolio company’s leadership team, not the private equity firm’s trading team. Using a different nickname for the effort also avoids confusion. How about the “Roadmap for Value Creation”?
What should the Value Creation Roadmap achieve? The first objective is to introduce key process owners from the business model to the investment thesis. Depending on who negotiated the deal for the portfolio company, these leaders and their subordinates may still be shocked by the change in ownership, let alone their expectations for EBITDA growth. When business model process owners initially come across the typical “3X in 3” investment thesis, they often express thoughtful emotions, followed by awkward moments to reestablish their composure. This reaction, however, may be the best due diligence the private equity firm’s trading team can find. This is the second objective of the Value Creation Roadmap: to identify what the leadership team knows that investors do not know about the scalability of the business model. By engaging those who actually lead the core processes of the company, valuable insights are gained, including (i) substantiated due diligence, (ii) clarified due diligence, (iii) invalidated due diligence, and (iv) omitted due diligence.
Okay. Now what? Given a finite pool of resources, leadership teams must prioritize initiatives that, in colloquial terms, achieve “the best with the least” (sic). This is the third goal of the Value Creation Roadmap: establish the “vital few” cumulative initiatives. As Larry Bossidy and Ram Charan remember the leaders of Execution: the discipline of getting things done, less is more, meaning teams do better at eliminating a few deliverables at a time. What happens when the “vital few” require bandwidth or skills beyond the realm of reality for the portfolio company’s leadership team? The response addresses the fourth objective of the Value Creation Roadmap: Identify Capabilities vs. necessities. This is a “moment of truth” for the private equity deals team. By drawing on the private equity firm’s network of subject matter experts, the business team builds relational bridges with the portfolio company’s leadership team while supporting the value creation effort. Of course, some private equity firms have operating partners who can cover the complementary skills necessary for the portfolio company initiative. Still, a reliever bullpen is advisable for three reasons. First, the operational partners may also have exhausted their bandwidth. Second, some types of deliverables are so rare that the business benefits better from outsourcing than from staffing. Third, an outsider may occasionally have more situational flexibility than a member of the company.
Initiatives invariably have a set of tasks, including a critical path for those tasks. In addition, there is an optimal order of execution in all initiatives and their necessary tasks. This is where good project management pays off. The execution recipe must be coded in a Microsoft Project plan. Project plans are very useful. Not only do they facilitate choreography and coordination, but they also aid general management, performance management, meeting agendas, and communications. This is the fifth objective of the Value Creation Roadmap: leadership in execution.
Did we forget the elements of the 100-day plan? Of course not! They are in the mix. The point is, when 100-day plans are done independently of strategic exercises, potential dysfunction occurs. Why? Both are based on a common resource. What happens with time? After the letter of intent (LOI), there is a tipping point where stakeholders consider the closing of the deal imminent. This is when planning should begin. “Homework” assignments begin in a two-week window on either side of the projected closing date. Ideally, the value creation roadmap session occurs within 30 days of closing.
In short, a corollary of Harvey MacKay (Swim with sharks without being eaten alive) line reminds us that we do not plan to fail; rather, we fail to plan. The best time window for the value creation roadmap suggested above is an 80-20 scenario. Keep in mind, though, that 80% is more than twice Ty Cobb’s lifetime baseball batting average. The results of prioritized planning are powerful.
