How does PE increase margins?
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?
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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.
They cut the fat
Easy ones are listed, but also removing legacy businesses. Depending on the size of the company, you’d be surprised on the amount of smaller firms that are trying to sell something they have no business being in the business of 😂
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
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?
EBITDA add-backs
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