How Operating Partners Create Value
Our take on the PE playbook, exit-readiness, and the "it depends" school of value creation
Every PE firm out there talks about their value creation playbook. And the way they talk about it makes it sounds like an immutable, repeatable process. The same moves, in the same sequence, for every company.
That sure sounds good. It’s comforting to believe your investors can just buy a company, plug in their fancy value creation machine, and let that machine (and the repeatable process it runs on) do its thing.
Unfortunately, this isn’t how it actually works.
Real-world value creation requires an “it depends” approach.
Every company has different strengths, gaps, challenges, and opportunities. And experienced PE ops teams spend a lot of time assessing “what they’ve got” during diligence, building a simple, short-term plan to address the key improvement levers in the business, and then making lots of little adjustments to that plan once the deal closes (and after they learn a lot more about how things really work inside the business, its market, and its customer base).
Real-world value creation is also about building backwards from the exit you’re trying to create. Who is likely to buy this company a few years from now? What data will they ask for? What evidence of progress and opportunity will they want to see? What questions will we need to answer for them to get them excited about the next 5-10 years for this business? The longer it takes you to answer those questions, the more of an unpleasant surprise selling the company is going to be - especially if someone surprises you with a potential offer a few years into the hold.
In this episode, Operating Partners Paul and Jim walk through what value creation actually looks like once you own the company: Why the work is different every time, what parts of the playbook stay consistent underneath all that variation, and how you can start thinking about exit-readiness before you even close the deal.
Some of the key questions we cover:
What does “don’t buy a company you don’t know how to sell” mean? This is about brainstorming what your potential future buyer will care about on day one and working backwards from the questions you know they’ll ask you.
What does value creation actually look like company by company? Our operating team focuses on the same few areas in every business (e.g., sales and marketing, product, finance and M&A, and people) but the specific plays we run (and how we sequence them) are different every single time. Jim and Paul talk about why, and what goes into both the art and science of building a value creation plan.
What are the few things you can do in year one of an investment that set you up to be exit-ready? These don’t always feel like they’re making a difference while you’re doing them. But if you finish them, you’re ahead of the vast majority of companies when it’s time to sell.
Time for the highlights.
Start Thinking About the Exit Right Away
If you’re doing it right, the day after you close a deal, you should already be thinking about what the business needs to look like for the next buyer. You don’t control the end market. You don’t control when offers show up. If six months into a hold the market gets hot and offers start coming in, you want to be in a position to respond — not scrambling to get the business ready for a conversation you weren’t expecting to have yet.
Here’s Paul and Jim on why exit readiness isn’t a year-four project, it’s a day-one mindset.
Look For Growth In The Customer Base
Most of the software companies we buy have more than one product. And if you go talk to an average customer and ask them what else the company could be doing for them, they have no idea. Nobody ever told them what else was on the menu.
So one of the first things we do with almost every business is fix that. Go to the existing customer base with what Paul calls “the apologist pitch”:
“Hey, I’m actually calling with a small apology. We had a meeting as a leadership team and realized we’ve done a really poor job of communicating everything we can do for you. I’m not assuming you’re going to buy something today. I just want to make sure you know (a) what’s on the menu and (b) when to call us when these things come up. Can we book a short meeting to take you through that?”
When you do this, two things happen:
Customers tell you, “I had no idea you guys did this other stuff.”
Some of them have a problem you can help them with (Pipeline! Nice!)
This is value creation at its simplest. No new product, no new market, no new customers. Just telling the people who already trust you what else you can do for them.
Here’s Paul and Jim on why the easiest growth in a portfolio company is usually found inside the customer base.
Exit Readiness Starts With Clean Customer Data
When a buyer starts looking at a software company, the first thing they ask for is the customer data. Who are your customers, what have they bought, how long have they been with you, what do they pay.
And the moment they ask, the clock starts. How long does it take you to respond? Can you pull it together in a day, or does it take two weeks of stitching together spreadsheets and reconciling against financial statements? The speed of that response sends a signal about the operational state of the business that’s hard to fake. Companies that can’t produce clean customer data quickly don’t just slow down the process — they create doubt before the real diligence even starts. Even PE firms that own portfolio companies without a good customer database will ding the next company they look at for the same problem. Everyone knows it matters. Not everyone does the work.
Here’s Paul and Jim on why clean customer data is the single most important thing you can have ready before a process starts.
What to Watch Next: Curious about how PE Ops got its start, and how it’s changing? Check out our episode on “The Evolution of PE Ops”, including the inside scoop on how ParkerGale has shifted our Ops team to the areas where our companies need (and want) the most help.
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This material is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Furthermore, this content is not investment advice, nor is it intended for use by any investors or prospective investors in any ParkerGale Fund. Articles may link to other websites or contain other information obtained from third-party sources - ParkerGale has not independently verified nor makes any representations about the current or enduring accuracy of such information. Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by ParkerGale; visit www.parkergale.com/what-we-invest-in for a full list of investments. Other important information can be found at www.parkergale.com/terms-of-use. For additional information regarding ParkerGale, please refer to ParkerGale’s Form ADV, available at adviserinfo.sec.gov.