Private Equity: Tests of Value Creation

Finding and creating value creation opportunities is necessary to get a private equity firm to supply the venture capital necessary to acquire a business. As a private equity advisor, you first create a list of potential targets and then you develop ways to create value for your targets. After 20 years of successful senior leadership and entrepreneurial experience, I believe there are three test questions you can ask that will verify your value creation opportunities. They will be discussed in narrative form below.

Wayne, Larry, and Mickey, three senior level sports team owners, were in deep discussion when I came upon them huddled over a table. Mickey was very animated about some calls he had been making to a diet and fitness operation that went by the name the WeightLossTribune. Apparently, he had been calling twice a week for three weeks and had yet to speak to a company decision-maker, but I knew this was not unusual.

Larry was frothing at the mouth as he updated the other two on how is attempt to contact ProAllStars, the sports apparel and merchandising company, was going when they noticed me. They straightened their faces, along with their clothes and sat, looking as attentive as students.

“Looks like you all are having an exciting time of it,” I said to break the newly formed silence.

“Well,” said Mickey, “It is hot and cold. We are all making our calls, and no one is getting past the front desk. I know you said that was expected. And yes, we are all developing our relations with the secretary and front office people.”

I smiled and nodded not really sure what to say.

“The problem is,” Larry took over, “with our value creation. We thought that would be easier, but now we are not so sure. I think I thought it would be easy. Do you have any tests for value creation?”

I nodded slowly. “How-to-Outline-A-List-Of-Value-Creation-Opportunities-As-A-Private-Equity-Advisor does have a few quick test questions. Maybe I should have given them to you last week,” I confessed.

“Honestly,” said Larry, “We were all so confident, it’s no wonder you didn’t. We will listen if you will tell us.”

“Of course,” I said with a wry smile.

They quietly took out their notepads and pens. It was sort of weird how quietly they did it.

“Test number one is to ask yourself if you will be able to roughly estimate the EBITDA (Earnings before interest, taxes, depreciation, and amortization) for each improvement? If you can, the sell will be easier with the private equity firm. Make sure to think of improvements in a quantitative form, dollars, percents, and so on.”

I looked around the table. They finished writing, and all sat posed to write more without moving. It was a bit eerie.

I continued, “Can you specifically list a number of steps that will be necessary to address each opportunity to improve value? If you can good, if not make your descriptions narrower and more clear.”

Again they wrote quietly and waited. I doubted my leadership skills were this strong, but when the iron is hot, strike. “Make sure to include a history of times when you made similar changes in the past successfully.”

I looked around the table. In unison, the finished writing and looked my way.

“Okay, you all are freaking me out,” I said. “You were all happy when I got here, now you quiet like you are at church. What is with you all?”

They looked at each other around the table. Wayne looked my way first. “We are really trying, honest.”

I was touched. “Guys, please don’t feel that way. This is a process, a long process. You all have been at it for a few weeks. It is likely going to take a year to land your first sell. Do not be discouraged. Do not be sorry. It will happen when it happens. It is always an unexpected event. Keep at it. It will happen.”

They smiled mildly and nodded.

“But don’t quit your day jobs yet,” I jested.

They laughed.

“Any questions?” I asked.

A chorus of,”No’s”.

“Then,” I said.

“I am out of here,” they concluded for me in unison, and I left.

Thanks for reading.

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