Most common/egregious business mistakes you see from companies you acquire?
I read a lot about how PE firms acquire and completely transform companies for a vast improvement in profitability before reselling.
What I'd like to know, as a businessperson myself, are the worst and the most common mistakes you see these companies make in managing their business. The sort of thing you are most frequently addressing, or the most fatal mistakes that lead to them selling under pressure.
Correct me if I'm wrong, but these seem to be common mistakes:
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Bloated management staff and overworked/understaffed lower level employees
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Overleveraged borrowing or mismanagement of borrowed funds in general
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Archaic business practices or tech that leads to wasteful spending
I imagine there has to be patterns, right? What mistakes should I avoid in managing my own business so I don't end up in a similar position?
Thank you for your time.
Can you be more specific around the kind of company you run (industry, size, etc.)? There are different challenges at different stages of growth... for example I (in software growth equity) basically never see companies with any of the 3 characteristics you're mentioning.
In terms of what I can say generically... see below:
1. Trying to be everything for everybody. It's very tempting to say yes to a prospect who's willing to pay you good money, but poor fits are usually an increased burden on staff, service, etc... and of course, there's a significant opportunity cost to serving people who will never become "power buyers" when your next top customer could still be out there. Being good at disqualifying is just as important as being good at qualifying.
2. Not knowing what you don't know. There's a bit of a maturity curve that I've observed where some "credible but not seasoned" founders think they know everything and don't need external help... kind of like the sophomore in college who thinks they've seen it all. Meanwhile, I've seen plenty of people with billion+ dollar exits readily seek out help on future ventures because they're mindful of their own limitations and gaps and look to bolster them, not hide them.
3. Being too slow to make changes. It's very easy for founders to be irrationally devoted to early employees whose skillsets have become irrelevant, or say "well this process has always worked for us" even if it may not scale. Sure there are definitely people out there who can go the distance and grow with the business... but generally speaking the people and strategies that got you from, say, 0 to 20M of revenue will need to evolve to go from 20 to 50M. You need to be willing to experiment and rethink these things.
4. Focusing too much on lagging indicators v. leading. Oftentimes a company won't pay attention to things going wrong until they miss a quarter. But most often, the factors that led to that miss (maybe a bad sales pipeline, lower inbound lead flow, an underlying market shift) were at work some months previously... so they're actually several quarters behind on reacting by waiting for those problems to show up on the P&L. Understanding your business model and the KPIs that are most predictive of future growth can help address issues before they start.
I was just asking in a general sense, after reading about the acquisition and transformation of medium sized financial companies that faced many issues mentioned in the post. Was also reading about what Jamie Dimon did in the 80s and the concept of a "fortress balance sheet." This is a very useful post and I appreciate you taking the time to write it out, as I am looking to develop software down the line using my experience in finance. I'm sure other people appreciate it as well.
The first point is insightful, not just taking on every customer you can because you can. So keeping a consistent focus on your ideal prospects as to not miss out on big opportunities or waste your time/resources on awkwardly paired customers because it is technically possible to get their business.
The second point I'd say is classic hubris. I already agree on this point, humility leads to greatness while arrogance creates a lot of blind spots and ignorance. I think it's important to take your ego out of the equation and admit ignorance when needed so you are open to adapt and improve. It's even easier to just work with someone like this.
The third point seems to be the hardest one, as the culture of these ventures often revolve around the founding group of people with a lot of shared experience and hard work getting things off the ground. People in software opt for a more "horizontal" structure, but if the company actually succeeds, then massive amounts of investor funds get squandered wastefully on overengineering and building bloated corporate structures underneath a leadership that was really initially qualified for technical roles. Also, refusing to adapt and seeing your competition progress and leave you behind.
The fourth point is also insightful. People would not pay as much attention to leading performance indicators if everything is going well. I think that falls into the second point of hubris, as a lot of great leaders are always paying attention to what they can improve, even when they are doing well. This really does seem like the difference between short-term and long-term thinking, and it's nice to see it put into practical terms.
That's a long response, but just processing and internalizing what you said. This is very valuable insight from inside the business, and you wrote it out for free, so it means a great deal. Will save this and take it into consideration.
In the middle market, a MASSIVE miss I've seen almost every PE group make is under investing in the finance team.
When I was a credit investor, we would get reporting packages that were exported from quickbooks, for $20+MM EBITDA companies, being run by a controller masquerading as a CFO.
You'd be stunned at how many problems stem from an incredibly unprofessional management team at the wheel.
See it's funny - before spending time in an operating role I probably would've been like eh, seems not ideal but how bad could it be? Now the idea of a $20M+ EBITDA company using QB is just a horrifying thought lol.
This is under talked about especially in less tech oriented businesses (think manufacturing and general industrial companies). Many companies will keep their guy from the early years of the business as a CFO/treasurer/controller when they aren't a CPA and don't actually have much finance/accounting knowledge. They're basically a glorified bookkeeper. You could hire a 27 year old audit CPA and they would likely do a better job and implement better controls/reporting within a few months.
LMM
1) Leaders who don’t understand data or how to drive decisions based on it
2) Bad record keeping and data management
3) Expecting A Team executives and paying way under market comp
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