For private equity firms investing in distressed companies, the early months of a turnaround can often resemble a hospital emergency room. While attention must immediately be paid to stabilising the business by focusing on cost structures and tightly managing working capital, success sometimes requires carefully investing in growth.
Strategic efforts focused on stabilising the bottom line serve a vital role, but rehabilitation is best achieved by identifying and implementing long lasting operational improvements and by taking advantage of opportunities to grow market share over time. With macroeconomic growth remaining generally flat, however, questions may arise. Are these additional resources justified, and is aiming for that extra lift realistic? Our experience at Sun Capital Partners suggests that despite the current economic headwinds, the answers are yes and yes. And we’ve found a number of areas where we can actively help our portfolio companies identify and realize untapped opportunities.
Flat economic periods create an atmosphere of risk aversion. However, testing to first determine what works on a smaller scale is a useful strategy for mitigating risk. Since the most impactful new strategies are often aggressive, it’s important they be tested before any widespread rollout. This is critical to avoiding widespread, very public missteps. But, once proven, rapidly deploying these successful initiatives will maximise the upside.
For example, Boston Market has implemented a series of significant changes – enhancing their menu, upgrading the dining experience, and launching an aggressive marketing campaign. But it’s important to underscore that this transformational strategy was carefully tested during a pilot involving just 10 stores. Results were analysed and strategic modifications were made. Only after the right mix of initiatives were found, was an aggressive national roll-out launched. Success has been borne out by Boston Market’s performance, with the restaurant recording three consecutive years of high single-digit comp store sales improvement.
Market share can be a game of inches, so keeping everyone focused on the incremental objective is another smart approach to employ during flat economic growth periods. We counsel our companies to avoid searching for one “silver bullet” solution, which sounds great but is always elusive. Instead, we suggest they develop a series of initiatives since the momentum created by small steps will compound and inject renewed energy and focus into the organisation.
We’ve also found thatcreating an open culture among portfolio companies can foster dynamic management team relationships that encourage new thinking and learning. This can be particularly valuable for executives at small and mid-sized companies. We’ve seen profound benefits from bringing our portfolio company executives together for workshops to promote the sharing of best practices, and provide insights into operational improvements. By provoking lively discussions and involving expert outside resources, we keep our management teams inspired, while providing an environment ripe for fresh thinking and doing so in an efficient manner. As an added benefit, management teams form valuable bonds that serve as an informal ongoing peer network.
Finally, private equity firms are also uniquely positioned to help individual portfolio companies identify pathways for growth through organised ideation sessions designed to foster creative thinking. Having seen the results first-hand, repeatedly, we’ve become a true believer in the power of group sessions to generate new ideas, identify short and long-term opportunities for operational improvement, and find new ways to improve performance.
While examining a cost structure and closely managing working capital are necessary first steps, businesses must continue to identify new opportunities during uncertain economic times. These operationally-focused initiatives are vital for long term survival. By helping portfolio companies formulate operational improvements, strategies for seizing new market opportunities and remaining focused – even during a flat economy – we can ensure businesses leave the proverbial operating room much healthier than when they entered.
T. Scott King is a senior managing director of Sun Capital Partners.