The last critical step of the private equity (PE) investment process, the exit, can greatly affect the final return on investment. Even after years of doing all the right things—including taking a proactive approach to ownership, aligning performance incentives, and being thoughtful about M&A—a poorly planned or executed exit can turn a good deal into a mediocre one.
Moreover, regardless of the exit strategy, and despite rising multiples, exits are becoming more challenging. Buyers are more sophisticated—and more demanding—than ever. Rapid technological change makes it tough for buyers and sellers to reach a shared understanding of risks as well as potential sources of value. And many owners struggle to create value past the initial one to three years of the holding period, during which the primary value levers are pulled. Together, these challenges make the exit process trickier to successfully execute and lead to a widening spread between strong and weak exits. Despite the complicated environment, PE investors can overcome these obstacles and achieve exit excellence through three distinct actions.
- First, they should perform a readiness scan 18 months before the intended time of exit.The initial scan is close enough to the anticipated exit that owners can have market and cycle visibility, and it is also still far enough out to address potential weaknesses in the investment story and establish a meaningful performance track record. Say a scan uncovers production delays in the launch of a new product or an increase in customer churn. Over the course of 18 months, it is reasonable for management to fix those problems and get performance trending in the right direction before these issues might turn off potential buyers.
- Second, to demonstrate further potential to possible new owners, they should instruct management to focus on value-adding performance improvements that continue to create value while preparing for the exit and post-transition stages. This process may include the somewhat counterintuitive step of leaving some value-creation opportunities on the table for potential buyers to execute.
- Finally, they should also prepare to disclose and actively manage unpleasant surprises and give forthright answers to buyers’ difficult questions. Investors that take this advice may drastically improve their exit performance, both by reducing the risk of exit process derailment and by helping to realize the full potential value of the transaction.