3 steps to prepare a portfolio company for sale

John A. Grivetti III, CPA
Prepare your portfolio company for sale

Private equity groups are always progressing their portfolio companies to sale – so how can those groups realize their full value? A Crowe specialist offers three steps that can help.

When a private equity group invests in a portfolio company, it’s normal to first focus on the details of the purchase – but to realize the full potential of the investment, just as much emphasis needs to be placed on the eventual sale. No matter where it is in the investment process, it’s vital for a private equity group to prepare the portfolio company management for a sale. Our specialist offers three steps for management to take that can help lead to a successful sale.

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  1. Management needs to effectively articulate the portfolio company’s story to potential buyers.

    The first and most important step is getting management ready to present the portfolio company's story, particularly the story of what happened while the portfolio company was under the private equity firm's ownership. Potential buyers will have a wide variety of questions, and it’s not only important to have (or be working toward getting) those answers, but also to present them in a way that’s clear, compelling, and concise. The portfolio company needs to build its credibility for it to realize its full value, and developing its story is a major way to do so.

    Here are some questions that can help portfolio company management develop its story:

    • How does the portfolio company provide value to the market?
    • How has the company’s financial performance progressed?
    • What products or services drive operating cash flow?
    • How has the company overcome operational issues?
    • How is the company addressing its resource needs for labor and input?
    • Is the company poised for future growth? How?

  2. Management needs to create and implement a smooth, streamlined diligence process.
  3. Once you decide to sell a portfolio company and hire an investment bank, it’s vital to engage in sell-side financial due diligence. Sell-side due diligence isn’t just a nice-to-have anymore – it’s a must-have and an expectation. Working with management to go through a dry run of the due diligence process – even if you don’t have an offer on the table yet – can be a great learning experience for the management team.

    For example, our private equity team recently had a client portfolio company get approached unexpectedly by a large international buyer. Though the portfolio company didn't have time to go through a full sell-side due diligence process, our team spent some time with the numbers and with the seller’s management, working through a set of standard questions. The client said that process was incredibly helpful in its preparation for discussions with the prospective acquirer.

    Finances aren’t the only thing to consider during due diligence – you might also want to think about topics like:

    • Tax: Be prepared to address items that buyers are sure to find and to understand the economic value effects of acquisition structuring.
    • Operations and IT: Operational and IT due diligence can help create a road map to address issues that a buyer would likely identify.
    • Human resources: Given the current tight labor market, be prepared to answer questions about how the company will retain current personnel and address future resource needs.

    This process likely will expose issues (both known and unknown) in your portfolio company. The important outcome of this process is to identify those issues before your prospective buyers do, so you can put thought into a plan to address them. Doing so ultimately helps you continue to control the story and demonstrate to prospective buyers that the management team is prepared to handle challenges.

  4. Management needs to think like a buyer when tracking financial performance.

    In any deal, you do not want to have issues identified by the buyer’s due diligence at the 11th hour, because the issues can significantly impact the value of the sale. Engaging in sell-side due diligence is one way to prevent this – and another is upgrading the financial reporting of your performance from the day you buy the portfolio company. Track performance in the business in the same way that you evaluated financial performance when your private equity firm was buying the portfolio company. Document (and include support) and record nonrecurring and nonoperating items “below the line” on a monthly basis to easily identify earnings before interest, taxes, depreciation, and amortization adjustments. Then, track and analyze the full-year effect of recent activities, including:

    • Significant new customers
    • Cost-cutting efforts
    • Productivity improvements
    • New products or services

Pull together this data in a thorough way, so you’re ready to quickly share it with prospective buyers, even before they do their due diligence. Continuously analyze what you think has recently changed in the business and what any acquirer or capital provider might ask for going forward.

Selling a portfolio company might not be top of mind for your private equity firm right now – however, the current market still offers a lot of opportunities to realize the value in your portfolio companies. Even if you’re not ready now, getting your portfolio company management ready for an eventual sale is a worthwhile investment to help realize its value down the road.


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John Grivetti - Large
John A. Grivetti III
Partner, Transaction Services