Will You Survive Private Equity Ownership?

Chief Marketing Officers are in a position to thrive under Private Equity (PE) ownership. PE firms invested because they want the upside, and marketing is a key ingredient to revenue generation. 

Chief Marketing Officers who help PE firms create value in their portfolio company also create a career ladder to success. PE firms go to leaders they trust in future engagements. Begin to reverse any negative thinking of the PE firm as a threat. If you are a results-oriented A-Player, then the PE firm may very well be your golden ticket. 

The thing most CMOs fear is Private Equity firm intrusion into everything they do.  That’s the wrong attitude and reflects a misunderstanding of PE. No CMO likes being on the hot seat, but the hot seat largely comes from not being up to the challenge of growth.   

What marketing leaders don’t always realize is the level of reluctance of the PE firm. Most PE firms prefer not to get engaged in day-to-day marketing decision making. They do so reluctantly and only when they feel they must.

When PE firms aren’t confident in the marketing strategy and results, they get engaged. That level of engagement is painful for the reactive CMO and for the PE firm. In many cases, CMOs can blame themselves for a painful intervention.  

What’s in it for the Deal Maker from the Private Equity firm? 

To thrive under Private Equity ownership, the CMO must understand that the PE firm deal maker wants to be able to sell the company for a large multiple. They want to buy a firm that is under-valued, or one they can improve the value significantly. 

The time frame is usually five years. Early in the investment, the PE firm will typically invest money to grow the company.  In the out years closer to the selling window, the PE firm wants to maximize EBITDA.

The bottom line is that the PE firm deal maker buys a company they can later sell for a multiple. Understand this core approach to avoid becoming an emotional infant. Their window for the sale is typically 5-7 years.  And they want a LARGE multiple. Embrace this aspect and immerse yourself into helping to support this effort.

Furthermore, CMOs need to understand how the deal maker is compensated. The majority of their total compensation is based on the success of the sale. Their base salary is relatively low. They have a huge upside where successful deals can make them millions.  

An action-oriented CMO thrives in this environment. Be an answer and not an obstacle. There is a common time line of activities involved in a PE acquisition. Understand where you are in the journey.  

Screening, Due Diligence and Offer

This involves evaluating the purchase, due diligence and then completing an offer.

Once the screening is complete, be ready to play ball. Due diligence is where the PE firm performs a deep dive. They seek to understand the effectiveness of the company, including sales and marketing. They use this to determine a valuation and whether to make an offer. 

Keys to success: 

• Engage and be available.  The PE firm has a fiduciary responsibility to look under the covers. Set aside emotion and play ball.
• Provide factual responses.  The PE firm will go deep and ask for things you don’t have. They don’t expect to find perfection.  Simply answer, respond, and fulfill with facts.
• Park your ego.  Avoid excuses and non-factual comments, as these are noise. Keep in mind the PE firm will evaluate marketing against best in class organizations. Gaps will be found.

   

First 100 Days

Don’t assume this is a honeymoon period after the close of the sale. The PE firm coaches the management team to develop plans that will achieve their goals and want a fast start. 

PE firms initiate major transformation to drive the improvement they require. The plan will center on operations, finance, and revenue growth.  The planning comes together in a 5 year plan that serves as a road map. The Chief Marketing Officer has the highest potential to shine in planning.   

Keys to success: 

• Start Anew.  Become emotionally disconnected from past marketing efforts. Understand the new goals of the company and align to those goals.
• Leverage PE Firm Expertise.  PE Firms have impressive capabilities and partners to leverage. A smoldering gap in most marketing organizations is the accurate sizing of market potential. PE firms excel in this area of market sizing.
• Assess Structure and Staff.  Proactively assess your current team’s ability to execute the plan. Analyze the structure and assess your team. Proactively perform this so the PE firm doesn’t have to ask. Don’t delay the inevitable and hurt marketing. Purge any hardliners that fight the new direction.

   

100 Days+

PE firms expect execution against the 5 year road map. Each year involves a plan of action that must be implemented to drive results. 

PE Firms value CMOs who contribute to the revenue equation.  

Keys to success:

• Stick to the Plan. Execute the plan with perfection by hitting milestones. Don’t change the plan without engaging key stakeholders.
• Quantify Results to the Overall Plan.  Leverage ProForma marketing planning tools to quantify impact.  Avoid showing activities as a result. Demonstrate how marketing is driving revenue (i.e. qualified leads that turn into quality opportunities, brand preference from quantifiable research, marketing attribution, etc.).
• Be Transparent.  Things don’t always go as planned.  Focus on learning from any missteps and recommending the course of action. Marketing leaders who cover up their mistakes lose credibility.

   

Action Steps

CMOs must accept that the PE firm is asking in the back of their mind about the CMO:

“What is marketing doing to Accelerate Value Realization?”

The PE firm’s criteria for assessing the answer include:

• Does this CMO have a plan?
• Are they executing the plan?
• What are the results?

   

What every CMO needs to ask himself/herself;

“What is my plan to contribute to revenue?”

To answer this question, breakdown the sources of revenue:

• What is marketing’s contribution to the funnel (acquiring new customers)?
• How am I increasing customer retention?
• What I am doing to cross-sell and up-sell exiting customers?
• How am I going to enable sales to increase their win rate (competitive positioning, sales enablement materials, etc.?

   

Have expectations gone up and left you wondering if you can make your number? Here is an interactive tool that will help you understand if you have a chance at success. Take the  test to rate yourself against SBI’s sales and marketing best practices.