How does PE increase margins?

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What exactly are key sources of margin cutting (common ways companies waste money) which PE sponsors look for when they evaluate whether the target has significant opportunity for cost reduction/margin expansion?

Comments (9)

 
  • Associate 1 in Other
Sep 11, 2020 - 5:39pm

Depends on the industry but other general examples are cutting out middlemen/using more direct distribution channels, driving better labor absorption, automation, better sourcing, taking certain functions/production areas in house, passing on price increases etc.

 
Sep 11, 2020 - 7:40pm

This is pretty important. We often trim product lines / entire business units which sure may result in lower sales but our realized margin tends to increase more with some of the more inefficiently run / impractical / archaic areas of the acquired company. Pretty high level and generalized statement but I would say overall a good point

 
Sep 11, 2020 - 8:04pm

acardboardmonkey TheBuellerBanker For legacy divestitures, what do you think of the following scenario: hypothetically if a business's core division (70-75% of revenue) has high operating leverage (high gross margin), that should imply that after SG&A it should have high EBIT margins when making lots of revenue. However, if the remainder of the business (25%-30%) is let's say services-oriented that would cause SG&A to be higher and depress the EBIT margin. How would PE think about the key considerations here - would the non-core business like this be a good spin-off target or would the sale compromise the balance of the business?

Array
 
Sep 14, 2020 - 2:45pm

In addition to points already mentioned here, PE sponsors tend to restructure employee/management compensation to better "incentivize" or align management/employee interests with business growth. So potentially cutting back base salary but giving more upside on company growth, etc. Also cutting down on some of the corporate perks. 

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