April 15, 2025 • 40 mins
In this episode of "Growing EBITDA," hosts James Bandy and Mike McSweeney dive deep into the intricacies of Value Creation Plans (VCPs) within the private equity landscape. They share their expert insights on how VCPs serve as strategic frameworks to drive growth, enhance operational efficiency, and maximize enterprise value. From defining what a VCP is to discussing its core components and execution strategies, this episode is packed with valuable information for business leaders, private equity professionals, and consulting clients. Tune in to learn about the importance of alignment among stakeholders, the role of strategic planning, and practical tips for successful VCP implementation.
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Highlights:
- Introduction and background of the deal
- Importance of Value Creation Plans in private equity
- Core components of VCPs
- Differences between strategic plans and VCPs
- Role of the CEO and management team in VCPs
- Collaboration between private equity firms and management teams
- Tactical and strategic elements of VCPs
- Long-term goals and operational improvements
- Importance of regular updates and accountability
- Practical tips for VCP implementation
- Tying VCPs to EBITDA growth
- Closing thoughts and key takeaways
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Welcome to the Growing EBITDA Podcast, where we unlock the doors to management and technology
(00:08):
insights in the middle market.
Join us as we explore innovative strategies to drive revenue and EBITDA growth, interviewing
industry leaders and technology experts.
Whether you're looking to streamline operations, understand the latest tech trends, or lead
your company towards exponential growth, you're in the right place.
Stay tuned and let's grow together.
(00:31):
I was thinking about a deal that we collaborated on last year and spent a lot of time together
working on.
And I thought it'd be an interesting one for our listeners.
We have the expert here, which is you.
You want to just kind of give the background, I know we pre-chatted everyone before, but
give the background on the deal and maybe we can just kind of jump into it.
Yeah, I think expert is a generous term.
(00:53):
Lively experienced maybe would be my phrase of choice, but appreciate the vote of confidence.
Yeah, so I'll give you the background.
James, you and I started working on a transaction in collaboration with one of our private equity
clients about 12 or 18 months ago now.
(01:14):
You were leading the due diligence, the technology and operations due diligence on the deal.
I was involved because we were co-investing in the business alongside our private equity
partner.
And one area that we spent a lot of time collaborating on, you and your team, myself, my team, and
(01:38):
the lead investor was value creation plan.
And value creation plans in private equity are a critical tool that many, if not almost
all private equity firms use in rolling out their investment thesis and driving the positive
(02:00):
growth in these investments and these businesses that they're seeking during their ownership
cycle.
So it really, there's a number of tools in the quiver, so to speak, value creation plans
or VCPs for short are a key quiver in that, a key arrow or a key tool in that quiver.
And I felt like maybe doing a deep dive into what they are for those that are less familiar
(02:24):
with how they work, maybe specifically in the context of private equity, because there
are some important nuances in this space.
I felt like that might be something worthy of spending a few minutes on here today.
I think so.
And I think that's an interesting lead in to helping folks understand, because there's
a lot that sits under it.
And I think for me, coming from the corporate side, I didn't really understand kind of the
(02:48):
nuance.
And I appreciate the opportunity to talk about it a little bit.
Yeah.
And it's a pretty straightforward name, right?
Value creation plan.
I think most of our listeners are going to hear that and say, yeah, have a plan to create
value in the enterprise, right?
Not too difficult.
Not too complex there.
And if you have any familiarity with VCPs in the private equity world at all, you'll
(03:11):
pretty quickly understand that this is really a strat plan, right?
From the corporate side.
Strategic plans, as we all know, may come in various different shapes and sizes.
No real differences when it comes to value creation plans, except for the fact that in
a private equity context, you're working with very hands-on board members, right?
(03:34):
If you're the CEO of a private equity-backed business, you're going to have pretty high
degrees of intimacy with your board members.
It could be very different from maybe being the divisional president of a $500 million
division of a large publicly traded company.
You're obviously going to be working with folks at corporate.
(03:55):
But it's a little bit different when you have a formal board that's comprised of equity
owners with controlling rights in many situations as it relates to the business that you're
running.
And while there are some private equity firms that can be rather hands-off when it comes
to some of this stuff, many of them can be surprisingly hands-on.
(04:17):
And when we think about value creation plans, VCPs, it's very important to have alignment
between those various different stakeholders, that very active set of board members, the
CEO and the executive leadership team of the business, and perhaps even other folks across
the organization.
So not a tremendous amount of differences between strategic plans in the corporate world
(04:41):
and value creation plans in the private equity world, but enough of a distinct set of differences
that I think it's worth talking through those today.
So I'm going to try to cover this fairly briefly.
If folks have more questions or want us to do a deep dive in a certain area, they can
certainly check in with us or shoot us a note, and we'll maybe cue up another episode in
(05:03):
the future on this.
But what we're going to cover today is really kind of defining what is a value creation
plan, talk about why they're important in the private equity ecosystem or the private
equity world, what some of the core components of VCPs are, and maybe some tips and tricks
for successful execution.
We're going to try and tailor this to a fairly broad audience, folks who maybe have a ton
(05:25):
of strap planning or VCP experience, maybe other folks that have a little bit less, maybe
it's somebody's first time being involved in a formal strategic planning exercise.
In the middle market, there's a lot of businesses who maybe have been entrepreneurially owned
and haven't had a really structured strategic planning framework that they've used to grow
the business in the past.
So some of this might be a little bit more basic for some folks, but we'll try and describe
(05:48):
some of the more advanced topics at the same time to broaden the appeal.
All right?
Sounds good.
Cool.
So let's start with definition.
As I've mentioned, a value creation plan is really a strategic framework that's designed
to identify, quantify, and implement initiatives that are going to enhance the value of a portfolio
(06:11):
company, right?
Portfolio company, simple term to represent a company that a private equity firm has invested
and it's in their investment portfolio.
And they're very important tools, right?
Because what a good VCP does is it's essentially, James, it's a roadmap for where we're going
to go over the next number of years, right?
(06:34):
And typically, a value creation plan is starting to take shape before the private equity firm
even owns the business, right?
During their diligence process, they're developing their investment thesis, most strong, well
experienced private equity investors are going to have a very crystal clear plan in their
minds of what they want to do with this business during their ownership cycle.
(06:56):
Now, the reality is though, is that private equity investors don't run the businesses
that they're investing in.
That's what management teams are there for, right?
The CEO, the CFO, the COO, and their direct reports, they need to run the business.
And obviously, they tend to know a lot more about the business in the market than these
(07:16):
private equity firms that are kind of coming in as outsiders in many cases.
And that's really where this kind of VCP plan starts to really take shape, right?
So the P firms kind of coming in with their ideas about where they want to take this thing.
And very early on in the ownership cycle, typically, in the first 90 days of the transaction
(07:36):
closing, they're going to start collaborating very heavily with the management team to make
sure that the management team's strategic plan, whatever that might look like, kind
of merges with the private equity firm's thoughts, right?
Because private equity firm may be coming in and they're doing their due diligence.
They're finding out some things, learning about the business.
They may have some interesting ideas or perspectives or relationships in the marketplace that may
(07:59):
be able to supercharge growth for the business.
They're probably not showing their entire hand to the management team as they're getting
to know them during diligence.
But after they've invested in the business, now we've got this cohesive relationship where
everybody's in this thing together, right?
If we all want to create the kind of economic outcomes that we want to see, we want to grow
the business, we want to improve and grow EBITDA so that ultimately we can sell this
(08:21):
thing to the next ownership group for a significant profit, we kind of got to all be drumming
to the same beat and rowing at the same time in that boat together.
And the VCP is just a really important tool to kind of align those stakeholders around,
very frankly, what do we need to do over the course of the next three to five years to
(08:41):
materially grow the EBITDA of this business so we can create the kind of outcome that
we want.
So quick question on that, Mike.
Sorry.
And this is an interesting insight for me that in this conversation, I don't think I
really truly understood that the VCP flexibility, you just talked about kind of ones done before
the transaction of the deal happens.
(09:03):
And it kind of gets aligned with the manager team and kind of harmonizes, if you will,
that VCP.
So playing that back a bit, is this kind of a living document?
Because again, you mentioned that folks coming from other corporate strategy, right?
It's kind of you write it at the beginning of the year and then you execute for essentially
13 months and then you rewrite it and you execute.
Is the VCP, can we think of it more as a living, breathing document that you're constantly
(09:25):
iterating on?
Yeah, I think it's a good question.
The answer is absolutely yes, right?
If you've spent any time in the corporate world, you've seen most people roll their
eyes when executives start talking about, we need to update our strategic plan, right?
It's like, okay, geez, we're going to spend the next six months in a bunch of not terribly
value added meetings and these days Zoom calls, trying to create a fancy document.
(09:50):
Maybe we've hired an expensive consultant to help us create a fancy document that we're
going to put on a shelf and never look at again for five years until corporate says
we got to dust that off again.
The reality is that well run companies know that strap plans are living, breathing documents.
They need to be updated and refreshed as market conditions change, as leadership changes,
(10:11):
as the business develops maybe new products or customers approach them with new needs
that they think that they can meet profitably.
They really need to evolve and VCPs are no different than that.
So yes, the PE firms, as you mentioned, pre-transaction closing, they were developing their investment
VCs.
Maybe they've developed a draft VCP, so to speak.
(10:35):
They're harmonizing that immediately to the extent that they've got those relationships
with the leadership team post-close, very swiftly post-closed.
And together, the board, the investors in this case, and the senior leadership, the
senior executives in the business are aligning on what are the needle movers.
And I think that's another important thing that I want to talk about as we define what
(10:59):
a VCP is and what it isn't.
There may be some tactical items that show up.
Maybe during diligence we identified that the company has 10 servers in their server
room and they're all no longer serviced, they're outdated, they're not supported.
We need to go buy new servers.
Let's just go upgrade new servers.
That doesn't necessarily have to make its way to the strategic elements of the VCP,
(11:22):
but it may be a very important post-closing item to work on.
So you may have in the first round of VCP planning, you might have some tactical just
go do it type items that get documented.
But the real intent is let's take a long-term, three to five year view at where we want the
business to go.
What markets do we want to be in?
(11:43):
What do we want our geographic footprint to look like?
What leadership gaps do we want to fill?
Where do we need to make upgrades from a technology perspective or from a human capital management
perspective?
Who do we want to go and acquire?
M&A is often a big part of value creation plans with private equity firms.
Most of our listeners are going to be well aware.
(12:05):
Private equity likes to do a lot of add-ons.
We like to do what we call roll ups or the term I like to use buy and builds.
Go buy a business and build it through acquisition, maybe they buy a hundred million dollar business
and go do 10 other add-ons or bolt on investments each at 20 million dollars in revenue.
Next thing you know, you're three years in, you got a 300 million dollar revenue business
(12:26):
that you're trying to integrate.
So that you tend to see M&A show up as a key component of a VCP.
So those are some of the easier ones to define.
Other things that it might include, really it should look at all of the key operational
financial and strategic improvements that the business needs to make in order to support
(12:47):
its long-term growth objectives.
And at the end of the day, the reason we call it a value creation plan is it really is a
tool that should be focused on driving return on investment and aligning the interests of
all the stakeholders involved to achieve the investment outcomes that we want to achieve.
Really you're going to see VCPs have very specific and almost always very objective
(13:13):
performance metrics and specific timelines calling out who's accountable for doing or
leading certain initiatives to make sure that we can, the stakeholders can follow through
and hold everybody accountable to achieving those goals.
You know, so really to take it back from the top here, what is it?
It's essentially a strategic planning document.
It lists out what we need to do, when we need to do it, who's responsible for what, and
(13:37):
what type of enterprise value it's going to create to the extent we're able to successfully
execute these objectives.
And to your point, this is something you want to review regularly.
The boards that I'm involved with, you're looking at this every board meeting and making
sure, hey, has anything changed?
You're refreshing your memory about where we're trying to strategically take this business.
(13:58):
And it becomes just a really important tool to keep everybody aligned during the number
of years that you're going to be working together as executives and investors.
At the board level, to talk about that for a second, just to close that out, because
I like that you mentioned it there.
So I have my VCP, I'm adjusting my VCP.
Thank you for that insight on that.
(14:19):
I'm continuing to work through that VCP.
When it comes to the board, do you feel that most of the time I'm adjusting that VCP based
on market condition needs, or I'm reporting out on that VCP eliciting feedback?
What is the, how's that plan used with that steering committee, and to call it that a
bit when you present that, how's that document used in that room compared to what you're
(14:41):
doing with your management team in your day-to-day operations?
Yeah.
I think that, like I mentioned previously, private equity investors do not view themselves
as business managers.
They view managing the day-to-day aspects of the business as the responsibility of the
CEO and the executive leadership team.
(15:02):
So while I recognize that I said that the private equity group is going to come in with
some type of straw man, or perhaps very detailed version of a VCP when they're buying the business,
right?
So we're going to invest in the business.
Day one, we kind of have a plan.
As much as that is true, they're going to expect very quickly for the management team
(15:23):
to take that input and incorporate it into management's plan.
So from kind of day one, from the investor's perspective, the management team owns the
plan, but the private equity groups want to speak into the plan, and they want to make
sure that their voice is heard, and they want to make sure that their best ideas, at least
that they think they're best ideas, are percolating to the top and are at the forefront of management's
(15:48):
mind, right?
And in some cases, you're going to find that everybody's in lockstep.
It's very clear who's going to do what.
There isn't even that much back and forth dialogue about the value creation plan.
In other instances, and we find this a lot in historically entrepreneurially owned businesses,
you might have a business that does $200 or $300 million in revenue who has never gone
(16:10):
through a strap planning exercise, who doesn't have any idea or any experience developing
or using tools like value creation plans.
So in those instances, the private equity investors or maybe some consultants that they
might engage who have expertise in strategic planning, there may be a lot more hands on.
(16:32):
Anything in between also could happen, right?
You see a lot of businesses maybe that haven't had a ton of M&A experience directly, right?
So maybe the private equity firm is going to be very collaborative in the development
very early on of the M&A component of the plan.
When it comes to actually rolling this out and deploying it, what that cadence looks
like, the communication back and forth, which I think is the root of your question, once
(16:56):
that plan gets developed, it's the expectation of the private equity board members that the
CEO is going to be giving you quarterly updates on that plan.
You may reference it on maybe your monthly calls or your weekly calls with the investor
group if you're the CEO.
Whereas with your management team, the expectation is that a CEO would be meeting regularly with
their management team to get updates on have we achieved X, Y, or Z goals or have we completed
(17:21):
A, B, or C tasks.
You might be updating the board that, hey, we've accomplished these or, hey, we tried
but we failed and here's why and here's the corrective action that we're going to take
to get back on track, whatever the case may be.
Yeah.
I think that side of how that roll up and reporting and continuing to look to that document
because in other episodes we've discussed, the real reason you're in the transaction
(17:45):
is to create that value and having that roadmap of how you do it sounds like a great plan
to align folks together.
So are there any other core components that folks should think about that maybe we haven't
discussed so far?
Yeah.
As I'm thinking through this more, James, the most successful value creation plans that
(18:06):
I've seen, they start with what are the long range revenue and EBITDA goals of the organization,
right?
Where are we driving this ship or this bus together?
And from that, you then kind of back into how you're going to achieve those goals, right?
And we've talked about that a little bit.
(18:26):
What are the strategic goals of the organization?
It could include some of the tactical goals, but it's not just about how we're going to
grow revenue and how we're going to grow earnings, right?
And how you might get there is talk about adding customers or like we've talked about
growth through acquisitions on the cost side.
Maybe the plan would include some cost reduction initiatives like deploying operational excellence
(18:48):
to reduce transactional costs in the business or optimize labor productivity or whatever
the case may be.
But it should also include things like market expansion, right?
Are we, you know, we're big believers too in thinking through strategic alternatives
or what we call them.
You might not be in this market today, but what if you went and got in that market, you
know, how much would that cost?
How much upside might there be from a revenue or earnings perspective?
(19:09):
How hard would it cost to grow into that market?
Pulling out and teasing out very specific operational improvements, the successful plans
will typically include very discreet optimization projects that the leadership team intends
to tackle.
And maybe that's improving ARP processes.
Maybe it's reducing DSOs by improving invoicing efficiencies.
(19:33):
Maybe it's, this is a big one from a technology perspective, upgrading our ERP system.
We see a lot of plans include things around innovation.
What's the next latest, greatest product?
Quite frankly, one of the plan items regarding innovation might be building out an innovation
process so that we as an organization become better at innovating new products on a more
(19:53):
predictable and repeatable basis.
And we want to make sure too, as building out these plans, that it's not just, hey,
we want to grow revenue by X and we're going to do that by a new end product development
process and these operating improvements, but also very specifically who in the organization
is responsible for leading those.
Because what we're going to ask is that those people go away and develop more tactical plans
(20:15):
for how they're ultimately going to go and achieve those.
And I think about the responsibilities of the CEO as it relates to the VCP, certainly
leading the charge and making sure that the team is collaborating to produce stretch goals
and to come up with what the strategies are to be able to achieve those goals, but also
holding the team accountable to building out the more tactical deployment plans for how
(20:40):
those goals are ultimately going to be realized and how those strategies are ultimately going
to be accomplished.
Now, you wouldn't typically see a CEO presenting back to a private equity board of directors
every single one of those tactical activities that needs to get done.
Typically, they're distilling that up to the higher level elements of that VCP.
And one of the mechanisms that they're going to use to communicate ongoing progress against
(21:04):
the plan is through the review of some of the key metrics that were defined as part
of the plan development that would allow them to kind of quickly understand and get ramped
up to speed as to whether or not we're hitting those targets.
Mike, I would be remiss if we didn't tie this back to the name of the cast, which is
Growing Ibara.
So I think you've really established a nice baseline.
(21:25):
You've taken us from what it is, how I create it, how I report on it, which I think is a
good journey so folks can kind of baseline.
Let's bring it back to kind of how is this Ibara hopefully creative, but how is this
Ibara kind of has it tie into Ibara?
How do you see that mechanism?
That can be either you mentioned KPIs and kind of those ties or maybe just kind of functionally
(21:47):
business wise.
What does this mean for my Ibara now that I have this plan and I'm executing for and
how do I kind of think about it from an Ibara perspective?
I think I'm probably going to answer that question maybe in a little bit of a different
way than you expect.
EBITDA is the common measurement that private equity investors like to use to value their
(22:11):
businesses or to value businesses.
And private equity investors kind of eat, live and breathe the EBITDA metric every single
hour of every day of their careers.
And the advice that I would give to folks who are dealing with private equity investors
(22:31):
maybe for the first time in their careers or who are looking at getting into maybe a
private equity backed business environment, you need to learn what EBITDA is.
You need to be well versed in its definition and why it matters to these private equity
groups so much.
And you need to learn to talk.
Your vernacular needs to change to focus on communicating impact to EBITDA.
(22:53):
So I think most of our listeners are going to be able to say, you know what, I understand
how this ties to EBITDA.
I'm trying to grow the earnings of the business to improve the enterprise value.
I think what sometimes gets lost though in value creation plan discussions is as the
CEO, as you're communicating this to your board of directors, putting it in their language
(23:13):
and always making sure that you're focused on driving EBITDA.
So for example, presenting strategies that have a strong focus on how much enterprise
value this initiative is going to create because of how much EBITDA will generate relative
to how much it's going to cost to execute or implement is kind of the way you want to
(23:36):
start talking.
What you don't want to do is say, hey, we want to go and enter this new market and we
think we can grow sales by X.
That's a fairly weak statement.
What private equity investors want to hear when you're giving them an update on your
VCP is, hey, we think that growing into this market is going to cost X, but it's going
to have Y impact to the bottom line.
(23:59):
And we think that we can achieve that in a 36 month window because even if you have a
longer term focused private equity group that is back to you, maybe they're trying to hold
that investment for 10 years or 15 years.
They want to know that the strategies that you're focused on, that they're being asked
to support investment into, whether that's time or hard dollars into, are the needle
(24:24):
movers.
That we're not going to focus on what somebody's pet project is in the business.
They really like that industry and that's why you want to expand into that industry.
They want to know that it's going to move the needle.
And they also want to be around conversations like, hey, should we go and build that capability
or should we go and buy that capability?
How much is it going to cost to do one versus the other?
(24:44):
And how much net impact, how much EBITDA is that version of this strategy going to produce
versus this other version of the strategy going to produce?
So I think that as you enter this kind of private equity ecosystem, making sure that
you're having these conversations and focusing on the impact of the bottom line and presenting
quantifiable metrics that you're going to use to hold yourself and your team accountable
(25:08):
to achieving those goals and sharing with those private equity firms that you intend
to present updates using data, which is going to allow them to make informed opinions and
insights and offer assistance and guidance and support.
That really is kind of the name of the game.
And that's how I think this whole thing ties back to EBITDA.
So I think that's some interesting guidance and feedback there.
(25:32):
You know, I went back and looked, obviously a lot of this, we talked about that transaction
earlier, family run business, great business.
We know that PE kind of targets those.
You did great work on figuring out the co-investment.
We had a lot of really rich conversations.
We had a good dialogue with that management team.
And so I went back and looked at my email in preparation for today's conversation and
found a couple of the questions that were asked along the way that I think maybe would
(25:55):
kind of help the folks kind of summarize all the insights we discussed today and just some
quick hit question answer, if you're okay with that.
So one of the questions I found was, how do I know I've created the V in VCP?
Is it qualitative, quantitative or how do I know I've gotten it and achieved that value?
I think it could be both.
You know, you might have qualitative value drivers.
(26:16):
An example might be you may know going in or the business may decide maybe for the first
time in its history, we need a CFO, right?
We need a institutional grade CFO to help us lead this business, report out our financials,
deal with our financing partners, the banks, etc.
And finding a great one might be your goal in X timeline.
(26:37):
So how do you measure that?
Box check, did you hire them or not?
Pretty easy one.
You know, the tough part is obviously getting a person that you like who sticks around and
you know, can create the value that you think they should be able to long term.
I think on the quantitative side, just putting basic metrics in place, right?
And reviewing those metrics, saying, hey, we want to improve this particular function
(26:58):
in the business by reducing its cost from X to Y.
Tracking that in a simple Excel spreadsheet is simple enough.
Reporting that out on a periodic basis, obviously reporting out the important ones to the appropriate
people you're not going to share with your board every metric that you might share with
your leadership team.
So yeah, I think it's as simple as that.
(27:19):
And the temptation a lot of times is to build really great plans.
You mentioned earlier, corporations build these plans, sits on the shelf.
I love the idea that I have some very kind of midterm goals or information I'm working
towards and then just kind of taking through it.
I think that kind of shows that inertia of improvement and drives a lot of great change.
Okay.
So we discussed kind of the board, we discussed the CEO, we discussed the management team,
(27:43):
which I think all of our listeners can understand because we're making this a bit analogous
to a strat plan and strat plans are in that same vein.
One of the things I think is a failure a lot of times on a strat plan is we sit in a room,
have a really great idea, but everyone struggles on how do I disseminate that?
So let's talk a little bit, this question here was, how do I disseminate the VCP to
(28:04):
the greater organization outside of myself and my direct reports?
I think like with any sort of strat planning, strategic planning exercises, there can be
a tendency to involve the senior leaders of the organization.
And that's a great place to start.
It's obviously a lot better than the CEO having his vision, maybe writing that down, his or
her vision, writing that down on paper and sharing it with the rest of the organization
(28:27):
to some degree or another.
The best plans, strat plans, the VCPs or whatever you want to call them, we believe are cross
functionally developed.
So we talked about maybe the private equity firm has their ideas pre before they've invested
in the business, the management team, obviously they've been running the business for a while.
They have their ideas about how they're going to grow and prosper.
(28:49):
And I think one of the things that is a really powerful tool if you haven't done it previously
is to get a broader audience engaged.
So maybe dipping down beyond the direct reports to the CEO into some of the directors, maybe
if that's the appropriate title in your organization and engaging those stakeholders, right?
(29:09):
Trying to solicit their feedback as you're designing the plan, posing the question of
them, posing the question to them of, hey, if we want to double in revenue in the next
36 months or 48 months, what do you think we need to do to get there?
What do you think are some of the challenges that we're going to encounter?
You'd be surprised what you might learn by talking with the head of IT who goes, oh geez,
(29:33):
I didn't realize you guys wanted to double the business and I didn't realize you wanted
to do M&A.
By the way, our ERP infrastructure fundamentally will not accommodate that.
Which might be an aha for, maybe you're a more commercially focused CEO who just loves
winning by selling more and spending a lot of time with customers.
You might not have a lot of technology expertise.
(29:56):
You might have overlooked something that could be of critical importance, right?
So first and foremost, I think the dissemination starts with disseminating the aggregation
of the best ideas into the plan formation.
So it starts kind of very early on in the VCP development process, engaging every stakeholder
that you think will add value to that process.
That's the first step.
(30:17):
The second step is not keeping them in the dark after you've solicited their great feedback,
going back to the team and saying, hey, through the iteration of the plan development, here's
what we heard.
What do you think?
Any additional input?
And then keeping them apprised of progress for that plan over time.
Now how you actually practically do that and disseminate that information, we think about
(30:39):
strap planning.
We think about VCP deployment and execution governance should follow some type of fairly
rigid framework and cadence.
So it's probably something that the executive leadership team is looking at in detail every
year on an annual basis to say, hey, are we still working on the right things?
Has anything changed in our business that should cause us to relook at some of these
(31:04):
key priorities?
So that happens on an annual basis.
On a quarterly basis, that leadership group, the CEO should be discussing with the board
of directors, here's how we're progressing to that plan, right?
So the board continues to be involved.
On a monthly basis, you would expect the CEO and their direct reports to be working on
status updates to that plan, which could include a broad swath of cross-functional leaders
(31:30):
and stakeholders in the organization.
And ultimately what we're trying to do is to drive accountability down into the org
to, hey, we've defined what the strategies are, we've defined what some of the tactics
are that we need to execute against to get here.
How are we progressing to that plan?
So you may even see some of these conversations show up in some of the weekly functional calls.
(31:51):
And there's different ways of rolling out multi-layered, especially getting into bigger
organizations, multi-layered VCPs or strat plans.
We could probably do a whole episode just on that.
But I think that's how you disseminate it.
Regular, open, honest lines of communication, making sure that those stakeholders who helped
contribute to the plan formation are being kept apprised of progress to date and anything
(32:13):
that would have changed that would materially change that plan.
One thing that's important to note in businesses that are doing M&A, your whole strategy may
very well change the second that you close that first big acquisition.
So completely re-looking at that value creation plan after a large merger takes place, immediately
after a large merger takes place is also something that's important to think about.
(32:35):
I appreciate the comments on that bottoms up approach.
So we do a lot of work, PMI work, right?
A lot of integration work.
And I think that this runs kind of similar to that PMI.
Within those work streams, you're really reaching into that middle management team to petition
ideas.
And I appreciate the comment you made of also re-informing of how those inputs.
(32:58):
So I gave you three pieces of feedback.
You made one decision.
Here's the decision I made based on some of your inputs, some of the needs, and we kind
of meet in the middle somewhere.
So I think that's interesting that maybe the question is less disseminate and more petition,
which I appreciate that view on.
Last question.
Super direct question.
I'm excited to take that tactical.
(33:20):
If you listen to the podcast today, this is something you walk away with and get started
on tomorrow.
Two tips for implementing a VCP post acquisition.
The best CEOs that I've seen are holding a meeting with their new investors that the
(33:42):
CEO is initiating, right?
This is how I think it's done best.
Within the first 90 days of a new owner investing in the business, whether they're a majority
owner or minority owner, a new investor is coming into the business, scheduling a meeting
with those investors that's outside of a board meeting to make sure that you've solicited
and fully understand their investment thesis, to make sure that they have a really good
(34:08):
grasp as to what you see as the biggest areas of opportunity to drive EBITDA growth and
ultimately drive enterprise value in the business.
And having a cross-functional dialogue about that, get in a war room together, lock the
doors, order some takeout and spend four, six, eight hours talking about all the opportunities
(34:28):
that the business has and why you think X, Y, and Z are the most important to focus on,
getting their feedback and maybe they're thinking that X and Y are extremely important, but
Z might not be.
Ask them why.
Why do they think that?
And then spend the first six months building a very comprehensive value creation plan that
(34:48):
takes into consideration their feedback from that initial meeting, plus the feedback that
you've solicited from your broader leadership team and maybe other important stakeholders
in the business and coming back to that board by maybe the second or third board meeting
and saying, listen, here is my plan.
Now in a much more mature business, maybe 300, 500 million, 700 million, maybe a billion
(35:11):
dollar in revenue mid-market business, you may have well-entrenched strategic planning
processes and frameworks and tools and plans that exist.
Some of this advice that I'm giving is probably more applicable to some slightly smaller businesses
who maybe haven't gone through this exercise in the past.
But if I'm a new CEO or I'm a CEO that's now finding myself that I'm owned and have
(35:33):
investors that are private equity in nature, that's how I would do it.
I'd have a meeting within the first 90 days between us boys.
I'd probably try and make sure that that happened in the first 30 days just to show that I'm
taking initiative here on what is, I guarantee you, an extremely important thing to focus
on as a CEO.
I try and have that meeting with those stakeholders very early on and outside of a board meeting.
(35:54):
You can talk about these during a board meeting, but let's have a structured collaborative
strategy session to make sure we're teasing out some really great ideas that everybody
has, getting them down on paper, writing them down always helps, asking which ones they
think would be their number one, number two priority, talking about why I think as the
new CEO, these would be my priority focus areas and then saying, hey, you know what?
(36:14):
I couldn't possibly have a plan developed in 15 days or 30 days.
Give me a couple months.
I want to go engage the rest of the stakeholders, make sure there isn't anything I don't know
about the business that they know about the business that could either hurt or help this
plan or accelerate this plan.
And let me come back to you guys with a really thoughtful first draft of this.
And I would call it a first draft and say, I want your input to the first draft, right?
(36:36):
And iterate with them a few times in the first six to nine months, certainly within the first
year of ownership, because bear in mind, if you're going to work fast, which is the beauty
of the private equity model, we want to work fast.
We want to grow businesses quickly.
We want to create really great economic outcomes and maybe a three, four, five, seven year
time period.
You got to make sure you got a good plan in place in year one.
So you have years two through five or two through seven to go and execute that plan.
(37:00):
And then what I would do, and this is answering your question a second time, what I would
do next then is I would make sure every time I have a board meeting, I'm giving them an
update on that VCP.
And you don't have to ask them to, you don't have to read it to them again the whole time,
right?
You can re-read before that board meeting, ask them to maybe take a look at a few particular
pages that maybe the team has refreshed or updated and continue to make sure that they're
(37:20):
apprised of what's happening and how you're executing to that plan and be prepared to
ask them for additional resources if you need to go and do that.
I think what a lot of CEOs don't realize about the private equity model is private equity
firms actually want to bring a lot of resources.
They want to invest a lot of money into these businesses to the extent that it supports
(37:42):
profitable growth.
So don't be afraid to ask for some big ticket items.
If you think you can accelerate the achievement of the plan, but you need three more million
dollars on some consultants to come in and do X or Y or Z, or you want to set up a new
facility and it's going to cost $20 million worth of new equipment, you'd be surprised
how quickly people are going to say yes.
If there's a really sound business plan that supports the broader VCP that you've all agreed
(38:06):
from day one is the right plan for the business, you'd probably be surprised how much support
you're going to get, but keeping them apprised all along the way in regular updates is certainly
a helpful way to get there.
I like that, adding that third.
So to play it back, number one, have that meeting the first 30 to 90 days.
Number two, present V1 within or version one of that plan within the first six months.
And you added a third, which I like, make sure to report it out and update folks.
(38:29):
Yeah, just keep people apprised to what's going on.
And we've just spent the last few minutes talking about how a CEO is engaging up into
the board, but some same version of the same thing back down across the organization, you've
got to keep those folks apprised.
And there's well-documented ways of how do you roll out strategic plans throughout businesses.
There's tools like goal deployment, strategy deployment, those types of tools, OGSM, OKRs,
(38:52):
there's 400 different versions that different smart folks have come up with over the years.
It doesn't really matter which version you use, as long as you use one of them and you
use it well.
You're consistent about it.
You're chatting with those teams regularly.
You're holding people accountable to cross off those tactical objectives that support
the broader strategy of the business.
Yeah, great.
Funny as we close out today, when I had joined an organization, so I was working, living
(39:15):
in Mexico, I came back to the US to work for a US organization and we had a strat meeting.
And in that strat meeting, they asked me what my BHAGs were.
Have you heard the phrase BHAG before?
I am unfamiliar with BHAG.
I don't think I want a BHAG.
Big hairy audacious goals.
Oh, there you go.
Yeah.
So that was one of those moments that I realized this strategy meeting is going to be a thing.
(39:36):
And so I appreciate you today breaking down this conversation, not at the BHAG level,
but at the detail level where folks can understand what's tactical.
I think there's a lot here.
I took a couple of notes during this and maybe we'll do a couple of follow ups where we deep
dive on some of these things around the KPIs, the communication.
I really like that.
And I know that we have some templates that we use with our clients and maybe we could
(39:57):
talk about what goes into those.
Any closing thoughts before we leave today?
Great for lunch.
Great.
Let's get at it.
Thanks everyone for listening and good luck on your value creation plans.
Thanks for tuning into this episode of Growing EBITDA.
If you like this episode, hit subscribe or follow us on LinkedIn for updates.
(40:17):
Got a topic you'd like us to cover?
Drop us a message.
We'd love to hear from you.
Welcome to the Growing EBITDA Podcast, where we unlock the doors to management and technology
(00:08):
insights in the middle market.
Join us as we explore innovative strategies to drive revenue and EBITDA growth, interviewing
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Whether you're looking to streamline operations, understand the latest tech trends, or lead
your company towards exponential growth, you're in the right place.
Stay tuned and let's grow together.
(00:31):
I was thinking about a deal that we collaborated on last year and spent a lot of time together
working on.
And I thought it'd be an interesting one for our listeners.
We have the expert here, which is you.
You want to just kind of give the background, I know we pre-chatted everyone before, but
give the background on the deal and maybe we can just kind of jump into it.
Yeah, I think expert is a generous term.
(00:53):
Lively experienced maybe would be my phrase of choice, but appreciate the vote of confidence.
Yeah, so I'll give you the background.
James, you and I started working on a transaction in collaboration with one of our private equity
clients about 12 or 18 months ago now.
(01:14):
You were leading the due diligence, the technology and operations due diligence on the deal.
I was involved because we were co-investing in the business alongside our private equity
partner.
And one area that we spent a lot of time collaborating on, you and your team, myself, my team, and
(01:38):
the lead investor was value creation plan.
And value creation plans in private equity are a critical tool that many, if not almost
all private equity firms use in rolling out their investment thesis and driving the positive
(02:00):
growth in these investments and these businesses that they're seeking during their ownership
cycle.
So it really, there's a number of tools in the quiver, so to speak, value creation plans
or VCPs for short are a key quiver in that, a key arrow or a key tool in that quiver.
And I felt like maybe doing a deep dive into what they are for those that are less familiar
(02:24):
with how they work, maybe specifically in the context of private equity, because there
are some important nuances in this space.
I felt like that might be something worthy of spending a few minutes on here today.
I think so.
And I think that's an interesting lead in to helping folks understand, because there's
a lot that sits under it.
And I think for me, coming from the corporate side, I didn't really understand kind of the
(02:48):
nuance.
And I appreciate the opportunity to talk about it a little bit.
Yeah.
And it's a pretty straightforward name, right?
Value creation plan.
I think most of our listeners are going to hear that and say, yeah, have a plan to create
value in the enterprise, right?
Not too difficult.
Not too complex there.
And if you have any familiarity with VCPs in the private equity world at all, you'll
(03:11):
pretty quickly understand that this is really a strat plan, right?
From the corporate side.
Strategic plans, as we all know, may come in various different shapes and sizes.
No real differences when it comes to value creation plans, except for the fact that in
a private equity context, you're working with very hands-on board members, right?
(03:34):
If you're the CEO of a private equity-backed business, you're going to have pretty high
degrees of intimacy with your board members.
It could be very different from maybe being the divisional president of a $500 million
division of a large publicly traded company.
You're obviously going to be working with folks at corporate.
(03:55):
But it's a little bit different when you have a formal board that's comprised of equity
owners with controlling rights in many situations as it relates to the business that you're
running.
And while there are some private equity firms that can be rather hands-off when it comes
to some of this stuff, many of them can be surprisingly hands-on.
(04:17):
And when we think about value creation plans, VCPs, it's very important to have alignment
between those various different stakeholders, that very active set of board members, the
CEO and the executive leadership team of the business, and perhaps even other folks across
the organization.
So not a tremendous amount of differences between strategic plans in the corporate world
(04:41):
and value creation plans in the private equity world, but enough of a distinct set of differences
that I think it's worth talking through those today.
So I'm going to try to cover this fairly briefly.
If folks have more questions or want us to do a deep dive in a certain area, they can
certainly check in with us or shoot us a note, and we'll maybe cue up another episode in
(05:03):
the future on this.
But what we're going to cover today is really kind of defining what is a value creation
plan, talk about why they're important in the private equity ecosystem or the private
equity world, what some of the core components of VCPs are, and maybe some tips and tricks
for successful execution.
We're going to try and tailor this to a fairly broad audience, folks who maybe have a ton
(05:25):
of strap planning or VCP experience, maybe other folks that have a little bit less, maybe
it's somebody's first time being involved in a formal strategic planning exercise.
In the middle market, there's a lot of businesses who maybe have been entrepreneurially owned
and haven't had a really structured strategic planning framework that they've used to grow
the business in the past.
So some of this might be a little bit more basic for some folks, but we'll try and describe
(05:48):
some of the more advanced topics at the same time to broaden the appeal.
All right?
Sounds good.
Cool.
So let's start with definition.
As I've mentioned, a value creation plan is really a strategic framework that's designed
to identify, quantify, and implement initiatives that are going to enhance the value of a portfolio
(06:11):
company, right?
Portfolio company, simple term to represent a company that a private equity firm has invested
and it's in their investment portfolio.
And they're very important tools, right?
Because what a good VCP does is it's essentially, James, it's a roadmap for where we're going
to go over the next number of years, right?
(06:34):
And typically, a value creation plan is starting to take shape before the private equity firm
even owns the business, right?
During their diligence process, they're developing their investment thesis, most strong, well
experienced private equity investors are going to have a very crystal clear plan in their
minds of what they want to do with this business during their ownership cycle.
(06:56):
Now, the reality is though, is that private equity investors don't run the businesses
that they're investing in.
That's what management teams are there for, right?
The CEO, the CFO, the COO, and their direct reports, they need to run the business.
And obviously, they tend to know a lot more about the business in the market than these
(07:16):
private equity firms that are kind of coming in as outsiders in many cases.
And that's really where this kind of VCP plan starts to really take shape, right?
So the P firms kind of coming in with their ideas about where they want to take this thing.
And very early on in the ownership cycle, typically, in the first 90 days of the transaction
(07:36):
closing, they're going to start collaborating very heavily with the management team to make
sure that the management team's strategic plan, whatever that might look like, kind
of merges with the private equity firm's thoughts, right?
Because private equity firm may be coming in and they're doing their due diligence.
They're finding out some things, learning about the business.
They may have some interesting ideas or perspectives or relationships in the marketplace that may
(07:59):
be able to supercharge growth for the business.
They're probably not showing their entire hand to the management team as they're getting
to know them during diligence.
But after they've invested in the business, now we've got this cohesive relationship where
everybody's in this thing together, right?
If we all want to create the kind of economic outcomes that we want to see, we want to grow
the business, we want to improve and grow EBITDA so that ultimately we can sell this
(08:21):
thing to the next ownership group for a significant profit, we kind of got to all be drumming
to the same beat and rowing at the same time in that boat together.
And the VCP is just a really important tool to kind of align those stakeholders around,
very frankly, what do we need to do over the course of the next three to five years to
(08:41):
materially grow the EBITDA of this business so we can create the kind of outcome that
we want.
So quick question on that, Mike.
Sorry.
And this is an interesting insight for me that in this conversation, I don't think I
really truly understood that the VCP flexibility, you just talked about kind of ones done before
the transaction of the deal happens.
(09:03):
And it kind of gets aligned with the manager team and kind of harmonizes, if you will,
that VCP.
So playing that back a bit, is this kind of a living document?
Because again, you mentioned that folks coming from other corporate strategy, right?
It's kind of you write it at the beginning of the year and then you execute for essentially
13 months and then you rewrite it and you execute.
Is the VCP, can we think of it more as a living, breathing document that you're constantly
(09:25):
iterating on?
Yeah, I think it's a good question.
The answer is absolutely yes, right?
If you've spent any time in the corporate world, you've seen most people roll their
eyes when executives start talking about, we need to update our strategic plan, right?
It's like, okay, geez, we're going to spend the next six months in a bunch of not terribly
value added meetings and these days Zoom calls, trying to create a fancy document.
(09:50):
Maybe we've hired an expensive consultant to help us create a fancy document that we're
going to put on a shelf and never look at again for five years until corporate says
we got to dust that off again.
The reality is that well run companies know that strap plans are living, breathing documents.
They need to be updated and refreshed as market conditions change, as leadership changes,
(10:11):
as the business develops maybe new products or customers approach them with new needs
that they think that they can meet profitably.
They really need to evolve and VCPs are no different than that.
So yes, the PE firms, as you mentioned, pre-transaction closing, they were developing their investment
VCs.
Maybe they've developed a draft VCP, so to speak.
(10:35):
They're harmonizing that immediately to the extent that they've got those relationships
with the leadership team post-close, very swiftly post-closed.
And together, the board, the investors in this case, and the senior leadership, the
senior executives in the business are aligning on what are the needle movers.
And I think that's another important thing that I want to talk about as we define what
(10:59):
a VCP is and what it isn't.
There may be some tactical items that show up.
Maybe during diligence we identified that the company has 10 servers in their server
room and they're all no longer serviced, they're outdated, they're not supported.
We need to go buy new servers.
Let's just go upgrade new servers.
That doesn't necessarily have to make its way to the strategic elements of the VCP,
(11:22):
but it may be a very important post-closing item to work on.
So you may have in the first round of VCP planning, you might have some tactical just
go do it type items that get documented.
But the real intent is let's take a long-term, three to five year view at where we want the
business to go.
What markets do we want to be in?
(11:43):
What do we want our geographic footprint to look like?
What leadership gaps do we want to fill?
Where do we need to make upgrades from a technology perspective or from a human capital management
perspective?
Who do we want to go and acquire?
M&A is often a big part of value creation plans with private equity firms.
Most of our listeners are going to be well aware.
(12:05):
Private equity likes to do a lot of add-ons.
We like to do what we call roll ups or the term I like to use buy and builds.
Go buy a business and build it through acquisition, maybe they buy a hundred million dollar business
and go do 10 other add-ons or bolt on investments each at 20 million dollars in revenue.
Next thing you know, you're three years in, you got a 300 million dollar revenue business
(12:26):
that you're trying to integrate.
So that you tend to see M&A show up as a key component of a VCP.
So those are some of the easier ones to define.
Other things that it might include, really it should look at all of the key operational
financial and strategic improvements that the business needs to make in order to support
(12:47):
its long-term growth objectives.
And at the end of the day, the reason we call it a value creation plan is it really is a
tool that should be focused on driving return on investment and aligning the interests of
all the stakeholders involved to achieve the investment outcomes that we want to achieve.
Really you're going to see VCPs have very specific and almost always very objective
(13:13):
performance metrics and specific timelines calling out who's accountable for doing or
leading certain initiatives to make sure that we can, the stakeholders can follow through
and hold everybody accountable to achieving those goals.
You know, so really to take it back from the top here, what is it?
It's essentially a strategic planning document.
It lists out what we need to do, when we need to do it, who's responsible for what, and
(13:37):
what type of enterprise value it's going to create to the extent we're able to successfully
execute these objectives.
And to your point, this is something you want to review regularly.
The boards that I'm involved with, you're looking at this every board meeting and making
sure, hey, has anything changed?
You're refreshing your memory about where we're trying to strategically take this business.
(13:58):
And it becomes just a really important tool to keep everybody aligned during the number
of years that you're going to be working together as executives and investors.
At the board level, to talk about that for a second, just to close that out, because
I like that you mentioned it there.
So I have my VCP, I'm adjusting my VCP.
Thank you for that insight on that.
(14:19):
I'm continuing to work through that VCP.
When it comes to the board, do you feel that most of the time I'm adjusting that VCP based
on market condition needs, or I'm reporting out on that VCP eliciting feedback?
What is the, how's that plan used with that steering committee, and to call it that a
bit when you present that, how's that document used in that room compared to what you're
(14:41):
doing with your management team in your day-to-day operations?
Yeah.
I think that, like I mentioned previously, private equity investors do not view themselves
as business managers.
They view managing the day-to-day aspects of the business as the responsibility of the
CEO and the executive leadership team.
(15:02):
So while I recognize that I said that the private equity group is going to come in with
some type of straw man, or perhaps very detailed version of a VCP when they're buying the business,
right?
So we're going to invest in the business.
Day one, we kind of have a plan.
As much as that is true, they're going to expect very quickly for the management team
(15:23):
to take that input and incorporate it into management's plan.
So from kind of day one, from the investor's perspective, the management team owns the
plan, but the private equity groups want to speak into the plan, and they want to make
sure that their voice is heard, and they want to make sure that their best ideas, at least
that they think they're best ideas, are percolating to the top and are at the forefront of management's
(15:48):
mind, right?
And in some cases, you're going to find that everybody's in lockstep.
It's very clear who's going to do what.
There isn't even that much back and forth dialogue about the value creation plan.
In other instances, and we find this a lot in historically entrepreneurially owned businesses,
you might have a business that does $200 or $300 million in revenue who has never gone
(16:10):
through a strap planning exercise, who doesn't have any idea or any experience developing
or using tools like value creation plans.
So in those instances, the private equity investors or maybe some consultants that they
might engage who have expertise in strategic planning, there may be a lot more hands on.
(16:32):
Anything in between also could happen, right?
You see a lot of businesses maybe that haven't had a ton of M&A experience directly, right?
So maybe the private equity firm is going to be very collaborative in the development
very early on of the M&A component of the plan.
When it comes to actually rolling this out and deploying it, what that cadence looks
like, the communication back and forth, which I think is the root of your question, once
(16:56):
that plan gets developed, it's the expectation of the private equity board members that the
CEO is going to be giving you quarterly updates on that plan.
You may reference it on maybe your monthly calls or your weekly calls with the investor
group if you're the CEO.
Whereas with your management team, the expectation is that a CEO would be meeting regularly with
their management team to get updates on have we achieved X, Y, or Z goals or have we completed
(17:21):
A, B, or C tasks.
You might be updating the board that, hey, we've accomplished these or, hey, we tried
but we failed and here's why and here's the corrective action that we're going to take
to get back on track, whatever the case may be.
Yeah.
I think that side of how that roll up and reporting and continuing to look to that document
because in other episodes we've discussed, the real reason you're in the transaction
(17:45):
is to create that value and having that roadmap of how you do it sounds like a great plan
to align folks together.
So are there any other core components that folks should think about that maybe we haven't
discussed so far?
Yeah.
As I'm thinking through this more, James, the most successful value creation plans that
(18:06):
I've seen, they start with what are the long range revenue and EBITDA goals of the organization,
right?
Where are we driving this ship or this bus together?
And from that, you then kind of back into how you're going to achieve those goals, right?
And we've talked about that a little bit.
(18:26):
What are the strategic goals of the organization?
It could include some of the tactical goals, but it's not just about how we're going to
grow revenue and how we're going to grow earnings, right?
And how you might get there is talk about adding customers or like we've talked about
growth through acquisitions on the cost side.
Maybe the plan would include some cost reduction initiatives like deploying operational excellence
(18:48):
to reduce transactional costs in the business or optimize labor productivity or whatever
the case may be.
But it should also include things like market expansion, right?
Are we, you know, we're big believers too in thinking through strategic alternatives
or what we call them.
You might not be in this market today, but what if you went and got in that market, you
know, how much would that cost?
How much upside might there be from a revenue or earnings perspective?
(19:09):
How hard would it cost to grow into that market?
Pulling out and teasing out very specific operational improvements, the successful plans
will typically include very discreet optimization projects that the leadership team intends
to tackle.
And maybe that's improving ARP processes.
Maybe it's reducing DSOs by improving invoicing efficiencies.
(19:33):
Maybe it's, this is a big one from a technology perspective, upgrading our ERP system.
We see a lot of plans include things around innovation.
What's the next latest, greatest product?
Quite frankly, one of the plan items regarding innovation might be building out an innovation
process so that we as an organization become better at innovating new products on a more
(19:53):
predictable and repeatable basis.
And we want to make sure too, as building out these plans, that it's not just, hey,
we want to grow revenue by X and we're going to do that by a new end product development
process and these operating improvements, but also very specifically who in the organization
is responsible for leading those.
Because what we're going to ask is that those people go away and develop more tactical plans
(20:15):
for how they're ultimately going to go and achieve those.
And I think about the responsibilities of the CEO as it relates to the VCP, certainly
leading the charge and making sure that the team is collaborating to produce stretch goals
and to come up with what the strategies are to be able to achieve those goals, but also
holding the team accountable to building out the more tactical deployment plans for how
(20:40):
those goals are ultimately going to be realized and how those strategies are ultimately going
to be accomplished.
Now, you wouldn't typically see a CEO presenting back to a private equity board of directors
every single one of those tactical activities that needs to get done.
Typically, they're distilling that up to the higher level elements of that VCP.
And one of the mechanisms that they're going to use to communicate ongoing progress against
(21:04):
the plan is through the review of some of the key metrics that were defined as part
of the plan development that would allow them to kind of quickly understand and get ramped
up to speed as to whether or not we're hitting those targets.
Mike, I would be remiss if we didn't tie this back to the name of the cast, which is
Growing Ibara.
So I think you've really established a nice baseline.
(21:25):
You've taken us from what it is, how I create it, how I report on it, which I think is a
good journey so folks can kind of baseline.
Let's bring it back to kind of how is this Ibara hopefully creative, but how is this
Ibara kind of has it tie into Ibara?
How do you see that mechanism?
That can be either you mentioned KPIs and kind of those ties or maybe just kind of functionally
(21:47):
business wise.
What does this mean for my Ibara now that I have this plan and I'm executing for and
how do I kind of think about it from an Ibara perspective?
I think I'm probably going to answer that question maybe in a little bit of a different
way than you expect.
EBITDA is the common measurement that private equity investors like to use to value their
(22:11):
businesses or to value businesses.
And private equity investors kind of eat, live and breathe the EBITDA metric every single
hour of every day of their careers.
And the advice that I would give to folks who are dealing with private equity investors
(22:31):
maybe for the first time in their careers or who are looking at getting into maybe a
private equity backed business environment, you need to learn what EBITDA is.
You need to be well versed in its definition and why it matters to these private equity
groups so much.
And you need to learn to talk.
Your vernacular needs to change to focus on communicating impact to EBITDA.
(22:53):
So I think most of our listeners are going to be able to say, you know what, I understand
how this ties to EBITDA.
I'm trying to grow the earnings of the business to improve the enterprise value.
I think what sometimes gets lost though in value creation plan discussions is as the
CEO, as you're communicating this to your board of directors, putting it in their language
(23:13):
and always making sure that you're focused on driving EBITDA.
So for example, presenting strategies that have a strong focus on how much enterprise
value this initiative is going to create because of how much EBITDA will generate relative
to how much it's going to cost to execute or implement is kind of the way you want to
(23:36):
start talking.
What you don't want to do is say, hey, we want to go and enter this new market and we
think we can grow sales by X.
That's a fairly weak statement.
What private equity investors want to hear when you're giving them an update on your
VCP is, hey, we think that growing into this market is going to cost X, but it's going
to have Y impact to the bottom line.
(23:59):
And we think that we can achieve that in a 36 month window because even if you have a
longer term focused private equity group that is back to you, maybe they're trying to hold
that investment for 10 years or 15 years.
They want to know that the strategies that you're focused on, that they're being asked
to support investment into, whether that's time or hard dollars into, are the needle
(24:24):
movers.
That we're not going to focus on what somebody's pet project is in the business.
They really like that industry and that's why you want to expand into that industry.
They want to know that it's going to move the needle.
And they also want to be around conversations like, hey, should we go and build that capability
or should we go and buy that capability?
How much is it going to cost to do one versus the other?
(24:44):
And how much net impact, how much EBITDA is that version of this strategy going to produce
versus this other version of the strategy going to produce?
So I think that as you enter this kind of private equity ecosystem, making sure that
you're having these conversations and focusing on the impact of the bottom line and presenting
quantifiable metrics that you're going to use to hold yourself and your team accountable
(25:08):
to achieving those goals and sharing with those private equity firms that you intend
to present updates using data, which is going to allow them to make informed opinions and
insights and offer assistance and guidance and support.
That really is kind of the name of the game.
And that's how I think this whole thing ties back to EBITDA.
So I think that's some interesting guidance and feedback there.
(25:32):
You know, I went back and looked, obviously a lot of this, we talked about that transaction
earlier, family run business, great business.
We know that PE kind of targets those.
You did great work on figuring out the co-investment.
We had a lot of really rich conversations.
We had a good dialogue with that management team.
And so I went back and looked at my email in preparation for today's conversation and
found a couple of the questions that were asked along the way that I think maybe would
(25:55):
kind of help the folks kind of summarize all the insights we discussed today and just some
quick hit question answer, if you're okay with that.
So one of the questions I found was, how do I know I've created the V in VCP?
Is it qualitative, quantitative or how do I know I've gotten it and achieved that value?
I think it could be both.
You know, you might have qualitative value drivers.
(26:16):
An example might be you may know going in or the business may decide maybe for the first
time in its history, we need a CFO, right?
We need a institutional grade CFO to help us lead this business, report out our financials,
deal with our financing partners, the banks, etc.
And finding a great one might be your goal in X timeline.
(26:37):
So how do you measure that?
Box check, did you hire them or not?
Pretty easy one.
You know, the tough part is obviously getting a person that you like who sticks around and
you know, can create the value that you think they should be able to long term.
I think on the quantitative side, just putting basic metrics in place, right?
And reviewing those metrics, saying, hey, we want to improve this particular function
(26:58):
in the business by reducing its cost from X to Y.
Tracking that in a simple Excel spreadsheet is simple enough.
Reporting that out on a periodic basis, obviously reporting out the important ones to the appropriate
people you're not going to share with your board every metric that you might share with
your leadership team.
So yeah, I think it's as simple as that.
(27:19):
And the temptation a lot of times is to build really great plans.
You mentioned earlier, corporations build these plans, sits on the shelf.
I love the idea that I have some very kind of midterm goals or information I'm working
towards and then just kind of taking through it.
I think that kind of shows that inertia of improvement and drives a lot of great change.
Okay.
So we discussed kind of the board, we discussed the CEO, we discussed the management team,
(27:43):
which I think all of our listeners can understand because we're making this a bit analogous
to a strat plan and strat plans are in that same vein.
One of the things I think is a failure a lot of times on a strat plan is we sit in a room,
have a really great idea, but everyone struggles on how do I disseminate that?
So let's talk a little bit, this question here was, how do I disseminate the VCP to
(28:04):
the greater organization outside of myself and my direct reports?
I think like with any sort of strat planning, strategic planning exercises, there can be
a tendency to involve the senior leaders of the organization.
And that's a great place to start.
It's obviously a lot better than the CEO having his vision, maybe writing that down, his or
her vision, writing that down on paper and sharing it with the rest of the organization
(28:27):
to some degree or another.
The best plans, strat plans, the VCPs or whatever you want to call them, we believe are cross
functionally developed.
So we talked about maybe the private equity firm has their ideas pre before they've invested
in the business, the management team, obviously they've been running the business for a while.
They have their ideas about how they're going to grow and prosper.
(28:49):
And I think one of the things that is a really powerful tool if you haven't done it previously
is to get a broader audience engaged.
So maybe dipping down beyond the direct reports to the CEO into some of the directors, maybe
if that's the appropriate title in your organization and engaging those stakeholders, right?
(29:09):
Trying to solicit their feedback as you're designing the plan, posing the question of
them, posing the question to them of, hey, if we want to double in revenue in the next
36 months or 48 months, what do you think we need to do to get there?
What do you think are some of the challenges that we're going to encounter?
You'd be surprised what you might learn by talking with the head of IT who goes, oh geez,
(29:33):
I didn't realize you guys wanted to double the business and I didn't realize you wanted
to do M&A.
By the way, our ERP infrastructure fundamentally will not accommodate that.
Which might be an aha for, maybe you're a more commercially focused CEO who just loves
winning by selling more and spending a lot of time with customers.
You might not have a lot of technology expertise.
(29:56):
You might have overlooked something that could be of critical importance, right?
So first and foremost, I think the dissemination starts with disseminating the aggregation
of the best ideas into the plan formation.
So it starts kind of very early on in the VCP development process, engaging every stakeholder
that you think will add value to that process.
That's the first step.
(30:17):
The second step is not keeping them in the dark after you've solicited their great feedback,
going back to the team and saying, hey, through the iteration of the plan development, here's
what we heard.
What do you think?
Any additional input?
And then keeping them apprised of progress for that plan over time.
Now how you actually practically do that and disseminate that information, we think about
(30:39):
strap planning.
We think about VCP deployment and execution governance should follow some type of fairly
rigid framework and cadence.
So it's probably something that the executive leadership team is looking at in detail every
year on an annual basis to say, hey, are we still working on the right things?
Has anything changed in our business that should cause us to relook at some of these
(31:04):
key priorities?
So that happens on an annual basis.
On a quarterly basis, that leadership group, the CEO should be discussing with the board
of directors, here's how we're progressing to that plan, right?
So the board continues to be involved.
On a monthly basis, you would expect the CEO and their direct reports to be working on
status updates to that plan, which could include a broad swath of cross-functional leaders
(31:30):
and stakeholders in the organization.
And ultimately what we're trying to do is to drive accountability down into the org
to, hey, we've defined what the strategies are, we've defined what some of the tactics
are that we need to execute against to get here.
How are we progressing to that plan?
So you may even see some of these conversations show up in some of the weekly functional calls.
(31:51):
And there's different ways of rolling out multi-layered, especially getting into bigger
organizations, multi-layered VCPs or strat plans.
We could probably do a whole episode just on that.
But I think that's how you disseminate it.
Regular, open, honest lines of communication, making sure that those stakeholders who helped
contribute to the plan formation are being kept apprised of progress to date and anything
(32:13):
that would have changed that would materially change that plan.
One thing that's important to note in businesses that are doing M&A, your whole strategy may
very well change the second that you close that first big acquisition.
So completely re-looking at that value creation plan after a large merger takes place, immediately
after a large merger takes place is also something that's important to think about.
(32:35):
I appreciate the comments on that bottoms up approach.
So we do a lot of work, PMI work, right?
A lot of integration work.
And I think that this runs kind of similar to that PMI.
Within those work streams, you're really reaching into that middle management team to petition
ideas.
And I appreciate the comment you made of also re-informing of how those inputs.
(32:58):
So I gave you three pieces of feedback.
You made one decision.
Here's the decision I made based on some of your inputs, some of the needs, and we kind
of meet in the middle somewhere.
So I think that's interesting that maybe the question is less disseminate and more petition,
which I appreciate that view on.
Last question.
Super direct question.
I'm excited to take that tactical.
(33:20):
If you listen to the podcast today, this is something you walk away with and get started
on tomorrow.
Two tips for implementing a VCP post acquisition.
The best CEOs that I've seen are holding a meeting with their new investors that the
(33:42):
CEO is initiating, right?
This is how I think it's done best.
Within the first 90 days of a new owner investing in the business, whether they're a majority
owner or minority owner, a new investor is coming into the business, scheduling a meeting
with those investors that's outside of a board meeting to make sure that you've solicited
and fully understand their investment thesis, to make sure that they have a really good
(34:08):
grasp as to what you see as the biggest areas of opportunity to drive EBITDA growth and
ultimately drive enterprise value in the business.
And having a cross-functional dialogue about that, get in a war room together, lock the
doors, order some takeout and spend four, six, eight hours talking about all the opportunities
(34:28):
that the business has and why you think X, Y, and Z are the most important to focus on,
getting their feedback and maybe they're thinking that X and Y are extremely important, but
Z might not be.
Ask them why.
Why do they think that?
And then spend the first six months building a very comprehensive value creation plan that
(34:48):
takes into consideration their feedback from that initial meeting, plus the feedback that
you've solicited from your broader leadership team and maybe other important stakeholders
in the business and coming back to that board by maybe the second or third board meeting
and saying, listen, here is my plan.
Now in a much more mature business, maybe 300, 500 million, 700 million, maybe a billion
(35:11):
dollar in revenue mid-market business, you may have well-entrenched strategic planning
processes and frameworks and tools and plans that exist.
Some of this advice that I'm giving is probably more applicable to some slightly smaller businesses
who maybe haven't gone through this exercise in the past.
But if I'm a new CEO or I'm a CEO that's now finding myself that I'm owned and have
(35:33):
investors that are private equity in nature, that's how I would do it.
I'd have a meeting within the first 90 days between us boys.
I'd probably try and make sure that that happened in the first 30 days just to show that I'm
taking initiative here on what is, I guarantee you, an extremely important thing to focus
on as a CEO.
I try and have that meeting with those stakeholders very early on and outside of a board meeting.
(35:54):
You can talk about these during a board meeting, but let's have a structured collaborative
strategy session to make sure we're teasing out some really great ideas that everybody
has, getting them down on paper, writing them down always helps, asking which ones they
think would be their number one, number two priority, talking about why I think as the
new CEO, these would be my priority focus areas and then saying, hey, you know what?
(36:14):
I couldn't possibly have a plan developed in 15 days or 30 days.
Give me a couple months.
I want to go engage the rest of the stakeholders, make sure there isn't anything I don't know
about the business that they know about the business that could either hurt or help this
plan or accelerate this plan.
And let me come back to you guys with a really thoughtful first draft of this.
And I would call it a first draft and say, I want your input to the first draft, right?
(36:36):
And iterate with them a few times in the first six to nine months, certainly within the first
year of ownership, because bear in mind, if you're going to work fast, which is the beauty
of the private equity model, we want to work fast.
We want to grow businesses quickly.
We want to create really great economic outcomes and maybe a three, four, five, seven year
time period.
You got to make sure you got a good plan in place in year one.
So you have years two through five or two through seven to go and execute that plan.
(37:00):
And then what I would do, and this is answering your question a second time, what I would
do next then is I would make sure every time I have a board meeting, I'm giving them an
update on that VCP.
And you don't have to ask them to, you don't have to read it to them again the whole time,
right?
You can re-read before that board meeting, ask them to maybe take a look at a few particular
pages that maybe the team has refreshed or updated and continue to make sure that they're
(37:20):
apprised of what's happening and how you're executing to that plan and be prepared to
ask them for additional resources if you need to go and do that.
I think what a lot of CEOs don't realize about the private equity model is private equity
firms actually want to bring a lot of resources.
They want to invest a lot of money into these businesses to the extent that it supports
(37:42):
profitable growth.
So don't be afraid to ask for some big ticket items.
If you think you can accelerate the achievement of the plan, but you need three more million
dollars on some consultants to come in and do X or Y or Z, or you want to set up a new
facility and it's going to cost $20 million worth of new equipment, you'd be surprised
how quickly people are going to say yes.
If there's a really sound business plan that supports the broader VCP that you've all agreed
(38:06):
from day one is the right plan for the business, you'd probably be surprised how much support
you're going to get, but keeping them apprised all along the way in regular updates is certainly
a helpful way to get there.
I like that, adding that third.
So to play it back, number one, have that meeting the first 30 to 90 days.
Number two, present V1 within or version one of that plan within the first six months.
And you added a third, which I like, make sure to report it out and update folks.
(38:29):
Yeah, just keep people apprised to what's going on.
And we've just spent the last few minutes talking about how a CEO is engaging up into
the board, but some same version of the same thing back down across the organization, you've
got to keep those folks apprised.
And there's well-documented ways of how do you roll out strategic plans throughout businesses.
There's tools like goal deployment, strategy deployment, those types of tools, OGSM, OKRs,
(38:52):
there's 400 different versions that different smart folks have come up with over the years.
It doesn't really matter which version you use, as long as you use one of them and you
use it well.
You're consistent about it.
You're chatting with those teams regularly.
You're holding people accountable to cross off those tactical objectives that support
the broader strategy of the business.
Yeah, great.
Funny as we close out today, when I had joined an organization, so I was working, living
(39:15):
in Mexico, I came back to the US to work for a US organization and we had a strat meeting.
And in that strat meeting, they asked me what my BHAGs were.
Have you heard the phrase BHAG before?
I am unfamiliar with BHAG.
I don't think I want a BHAG.
Big hairy audacious goals.
Oh, there you go.
Yeah.
So that was one of those moments that I realized this strategy meeting is going to be a thing.
(39:36):
And so I appreciate you today breaking down this conversation, not at the BHAG level,
but at the detail level where folks can understand what's tactical.
I think there's a lot here.
I took a couple of notes during this and maybe we'll do a couple of follow ups where we deep
dive on some of these things around the KPIs, the communication.
I really like that.
And I know that we have some templates that we use with our clients and maybe we could
(39:57):
talk about what goes into those.
Any closing thoughts before we leave today?
Great for lunch.
Great.
Let's get at it.
Thanks everyone for listening and good luck on your value creation plans.
Thanks for tuning into this episode of Growing EBITDA.
If you like this episode, hit subscribe or follow us on LinkedIn for updates.
(40:17):
Got a topic you'd like us to cover?
Drop us a message.
We'd love to hear from you.
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