Preparing for PE Investments and Exits
Alline Akintore & Matt Compton
November 2024
As part of our portfolio success program, we look for opportunities to connect portfolio executives and board directors with successful peers who can share best practices and instructive case studies.
This fall OVF hosted a private equity workshop with the goal to help portfolio CEOs, CFOs and board directors think about how they, together, can prepare early for a growth equity round down the road or a PE-led exit.
We were privileged to be joined by Colleen Yeager, former CFO at OVF backed Jama Software. As a finance leader, Colleen helped prepare for and structure Jama’s $255M growth equity round led by Insight Partners in 2018 and a $1.2B exit to Francisco Partners in 2024.
Here are a few takeaways from the discussion:
Prepare early
CEOs should develop relationships with firms years before a process begins. CEOs should connect with PE firms early - introducing themselves, the business and establishing rapport.
Prepare for potential growth rounds and exits with clean data from as early as possible. High fidelity data, systems and processes not only improve business intelligence and decision-making but are critical for later-stage transactions. Multi-year customer data around usage, pricing, and renewal is particularly important.
Establish a culture of data-driven planning, decision-making and accountability. This brings everyone along and helps keep teams accountable. For example, record sales calls and review with sales reps to identify opportunities for improvement.
Create a culture of integrity and transparency from the get-go. A culture where there will be no temptation to juice numbers. A management team needs to be able to establish trust and credibility with interested private equity firms and acquirers. Track record and consistency are key to this.
Preparing for a transaction
The board and CEO should ensure they have legal counsel experienced in PE transactions involved, whenever a process is imminent
When the board has green lit a transaction, the company should consider having three key items ready:
A company information profile
Consider having this in two formats: 1) a teaser deck with high level information on the company, performance, market and growth opportunities; and 2) a detailed full deck with a deep dive on the business, market and competitive landscape, as well as growth opportunities
A customer data cube
Understand your customers and their segmentation in depth and detail. Down to geography, price point, going back as far as possible. This is the most important item in financial diligence (and this is why establishing good systems and processes early in the company will reap rewards)
A 3–5-year financial forecast
Depending on your business model, deconstruct your financials in detail. One example is clarity on billings-based EBITDA versus ARR-based EBITDA.
Ideally, revenue per employee should be trending upward
Have a realistic operating plan. It might be tempting to show aggressive growth but do so only if you can reach your targets.
Diligence
Identify the team from inside the company that will participate in the diligence process and identify who will manage the process.
Ensure that the team understands the data inside-out before submitting it for diligence. Do what it takes to avoid any surprise questions about oddities in the data.
Something to keep in mind: As the CEO and executive team, you will have to be intentional about who to disclose to and involve in the process
High-quality metrics! Depending on your industry, there will be an assortment of metrics PE funds will be looking for. That said, no matter what industry you are in, investors will be looking at 1) topline growth rate, 2) profitability and 3) customer retention.
You want to be in the upper quartile for these three metrics for your industry. If you are not, be ready to articulate why with clarity and detail.
For customer retention:
Gross retention benchmarks: 80%+ for midmarket and 92%+ for enterprise customers
Net revenue retention should be 110%+. Ensure that it is not just price increase contributing to this metric.
Thinking about post-investment
If you have the privilege to be evaluating multiple firms (as they evaluate you), it is crucial to understand the PE firms’ philosophy on growth. Some firms look for growth through acquisitions and others drive growth through sales efficiency. At the end of the day, you know your business and market best, and you might want to give thought to what a post-transaction working relationship might look like.
Our gratitude to Colleen, our portfolio execs and board directors for an insightful and engaging conversation.