Happy New Year! PE4Fams has not been slacking in the New Year … just busy with multiple opportunities to grow our portfolio companies and acquire some new platforms.
Over the last 30 days our team has been conducting all kinds of due diligence from quality of earnings to customer interviews and market surveys. In varying degrees as part of our diligence process we often get access to senior management (CEO, CFO and VP of Sales) but we rarely meet middle management before we own the company. That is really too bad because we have learned with experience that many small businesses thrive or fail because of the strength of the middle management. We were lucky enough in a recent opportunity to meet all the middle managers and they were committed, intelligent, energetic, and heroic. They were powering the target business and helping it thrive.
Promote The Middle Managers
This lesson has been reinforced for us in crisis situations. One of our most experienced and battle tested advisors, Mark Bronstein, has spent his career dealing with middle market companies under duress. Whether it is a receivership assignment, a turnaround management role or a straight forward liquidation of assets for creditors, Mark has a simple formula for testing whether the business is viable. He replaces the senior leadership with middle management.
His experience is that senior leadership is often responsible for the crisis. It is often their failure of leadership that has put the business in jeopardy, not the business model, the customers, suppliers or creditors. He is quite confident in the tenured middle managers who understand how the business runs, what customers expect, how to cut costs and how to create confidence with suppliers and vendors.
Much to our dismay he proved this to be true in a turnaround assignment for us in a small portfolio company. That company was distressed when we bought it and more distressed after the first six months of operation under a CEO we had recruited to run the business. That CEO was not suited to the turnaround task , so we parted ways in favor of another CEO who came from the same industry and who had numerous sales and marketing contacts. He compounded our misery by assessing the problem to be revenues.
Revenues Are Not Always A Solution
Revenues come in many flavors and a few of them are simply awful. In this case the prices at which the CEO added revenue were below our cost of goods sold. Six months later we were losing money and hemorrhaging cash.
We brought Mark in to save our investment. The first thing he did was assess the capability of the middle managers. He concluded that there were numerous centurions who could run the business without involvement of the current senior management team. So, without promotions or fancy titles he simply passed the management responsibility to the plant manager and the operating leaders. He worked with the new team to assess true profitability by customer and he terminated those relationships that lost money. He managed this process remotely with complete confidence in the new team to achieve our objective of generating free cash flow, albeit at a much lower level of revenue.
Today that business is recovering nicely without any senior management. Mark was right. The middle management knew how to run the company.
Your insights are welcome
Periodically we will circulate this blog to a target market that includes successful families, wealth advisors and middle market business owners.
Please send us emails, articles, YouTube videos, tweets or even old-fashioned means of communication like voicemails, mail or a phone call on the topic of Private Equity For Families. All ideas are welcome.
