“We spend about one-third of our time in the exit process gathering and processing data.”
(Anonymized quote from an M&A advisor)
1. Wouldn’t it be more efficient if we could quickly respond to all our buy-side and sell-side advisors’ questions with structured data and key performance indicators (KPIs)?
Most of the time, private equity investors’ advance planning for an exit process involves considerable procedural detail and time effort. For both investees in the private equity environment and its management, the exit process is one of the most labor-intensive phases of the entire investment period – whether it involves meetings plus several management presentations or inquiries from potential bidders and their buy-side advisors about the company’s performance.
The portfolio company always bears the burden of reporting and data sovereignty, and management is always responsible for generating analyses and assessments for the sale process. That’s why it’s immensely important to prepare both the company and its management for the exit in terms of data management and reporting before the sale discussions ever begin – so they can provide fast and efficient responses to all the buy-side and sell-side advisors’ questions.
2. Key challenges during the exit process
Most of the time, a company’s performance parameters are in short supply, so in the first step you need to define specific KPIs with management and the investor. Ideally, these KPIs or growth drivers should have already been used to manage the company. As much as the situation allows, they should also reflect the business model and business plan for the coming years. Traditionally, there’s a distinction between financial KPIs (like revenues, costs, and EBITDA) and operational KPIs (like the sales pipeline, procurement and product management, and production). As the significance of sustainable investments in the private equity sphere increases, there’s also been growing interest in KPIs for this sector (including carbon footprint, human resource diversity, and compliance incidents).
The biggest challenge in the exit process is laying the data foundation for all future analyses. Especially in an M&A context, buy-and-build strategies have often been pursued in which many different ERP systems and data sources need to be combined. And most of the time, this data is inadequate in terms of structure, quality, and substance. Based on our experience at base camp, we recommend setting up a coherent, consolidated data structure that pools both financial and operational data on the entire system and tool landscape. An enterprise data warehouse will offer multiple advantages for the company and the investor.
3. An enterprise data warehouse is the fast and efficient solution for modern data management
This approach of tying in all of a company’s operating tools and systems results in an intelligent, structured, coherent data source – the “single source of truth”. In this way, the portfolio company and the financial investor get transparent company data that gives them information about KPIs and any value strategies before the sale process even begins. In addition, there’s the option to establish a durable, standardized, automated, and multi-dimensional reporting structure within the company using modern tools (BI applications like Microsoft Power BI). This allows inquiries from potential bidders and their advisors on topics like sales verticals over time (including customers, geography, and product groups), segmentation by partner vs. direct sales, and cost breakdowns to be answered more quickly and efficiently and in greater detail.
State-of-the-art data management and sound management reporting using up-to-date business intelligence applications help make the sale process transparent and assist all relevant stakeholders with making decisions that will hold up in the future.
Operationalizing, and thus implementing, this data-driven approach will involve a project time frame of about two months for portfolio companies in the private equity environment. This means that to prepare investees for an exit, investors should launch an initiative within the company well before the exit discussions begin. This will reduce the expense of having M&A advisors gather and prepare data, and the time saved can be used to extract deeper insights from the analyses. Additionally, the exit story could be more specified based on the early insight on the KPI development.
Figure 1 shows an anonymized example from one of our client’s past exit process projects. Highly detailed analyses of current and historical sales and revenue figures by segment – for example, customer groups, sales channels, and product groups – trimmed several weeks from the client’s sale process.
Source: Base Camp
4. Key take-away: A digital partner before and during the sale process is needed
For both, sell-side and buy-side, it’s highly recommended to work with external experts in terms of data management, data warehousing and full-stack management reporting. On the one hand investors can speed up their exit processes and on the other hand, with a reliable data structure all stakeholders will gain more trust in data and its KPIs. At best, investors and its portfolio companies already launch such initiatives during holding period or after acquisition together with external consultancies.