This article is useful to PE Funds and CXO’s of PE invested companies who are eyeing an exit in the next 12-18 months and looking to strengthen/ streamline decision support systems, squeeze cost reductions, enhance governance mechanisms, implement risk management systems which will help them build a case for better valuations closer to the date of an exit either through listing or through sale to another PE fund.
How does a company get itself exit ready? Unfavorable market conditions and not so good business environment are today stated as primary reasons for PE funds and companies not being able to get an exit. A recent article in the Economic Times states that there are close to 630 PE invested companies, which are waiting for an exit. There is pressure and increasingly frustration building up from the LP’s to get them an exit. In a scenario such as this, is it all gloom or is there something that companies waiting in the exit queue could possibly get done over the next 12-18 months to maximize the chances of the exit happening? The more fundamental question is ‘Have Companies and Funds looked at all possible means internally to strengthen the company from within’? Given the tough external environment and uncertainty regarding the extent and timeframe of the turnaround, is there a case for companies to spend time looking inwardly?
Shashank was getting jittery 6 months back. It was a year since he has taken over as CFO of this leading Garment Company, which was also invested by a PE fund. The investors were past the due date on the timeline to exit the business since the business environment had become tougher over the last couple of years with forex fluctuations and competition from smaller players eating into the market share. Attrition levels across all categories also saw an increase; credit lines were tougher to obtain and cost of operations were on the rise. Shashank was increasingly getting a feeling that he was gradually losing grip of the ‘Business Parameters’ that he was once tracking. The attrition and the subsequent re-organization in the roles had created data entry back logs, non – adherence of system protocols, lack of general co-ordination with both external (customers, suppliers) and internal stakeholders (business heads, functional heads) which was turning out to be what seemed a ‘time bomb waiting to explode’.
Shashank was reminded by all and sundry including his fellow CFO’s with whom he spoke that the state of affairs of the company was only reflective of the economic conditions that seemed to have enveloped us and that nothing much could be done till such time the situation improved. Shashank had two options – (1) to bide his time till things got back to normal externally or (2) to get the company geared and look at what could be done to improve things internally. He decided to take the second option with the confidence that when things improve his company will be ahead of the curve as compared to so many others who are looking for an exit/ waiting for things to happen and that they would then be able to ride the wave at that point in time.
Shashank decided that he would manage this through a combination of in-house recruitments and by bringing in ‘Finance Specialist Agency’. The objective of doing this was to ensure that the in – house recruitments will continue to push the company’s day to day finance agenda while the ‘Finance Specialist Agency’ plugs the existing gaps and works on multiple pain areas with clearly defined timelines. Shashank by doing so had also smartly reduced his chances of failure by creating multiple smart options. The move also allowed Shashank to focus on core CFO activities and also reduce the risk of attrition by having a back up in the form of an agency who were available to ‘scale up’ their teams in case of a need.
Shashank breathes easier these days. The last 6 months has been a lesson not just for him but also for all other senior managers within the company. The journey just didn’t end with bringing additional people in, it also involved defining expectations and constantly measuring them to identify exceptions. Some of the issues of the past like getting visibility into business performance, data entry backlogs, adherence of system protocols and co-ordination with stakeholders are now behind Shashank. He now spend a lot of his time with his CEO in fine tuning the business model, with the investors in explaining the changes in the business, with the functional heads in streamlining pricing models, cutting operational costs through efficiency improvement etc.