Author: Gerald O'Dwyer

Executive Summary

Entering the private equity (PE) arena is a challenging yet rewarding journey, requiring not only operational expertise but also a deep understanding of the PE industry’s dynamics, especially when it comes to exits. This case study focuses on the insights shared by Themos, a seasoned executive coach, highlighting the critical strategies executives must implement to achieve significant exits. Themos emphasizes that PE is a profession driven by specific growth levers and requires understanding the full lifecycle of a business from acquisition to exit.

Background

Themos has extensive experience in private equity, having worked on numerous mergers and acquisitions, as well as coaching executives through their journeys in PE-backed companies. His approach focuses on seven key growth levers that can drive business success, while also preparing executives for the unique challenges that PE presents. His philosophy revolves around demystifying the PE playbook, helping executives navigate through the complex world of private equity by understanding how to maximize their companies’ value while aligning with PE firms’ exit strategies.

Challenges

Executives face several key challenges when entering the PE world, as identified by Themos:

1. Cultural and Operational Adaptation: PE firms operate at a different speed and with a heightened focus on maximizing value within a set timeframe, usually three to five years. Executives need to quickly adapt to these heightened expectations and performance pressures.

1. Misalignment with PE Expectations: Many executives fail to stay aligned with the PE firm’s investment thesis. This misalignment often leads to early exits from their roles or failure to realize the anticipated equity gains.

1. Execution of a Growth Plan: Executives need to have a clear plan to grow the business across multiple dimensions, but many struggle to optimize the various growth levers, such as customer acquisition, lifetime value, and profitability.

1. Exit Preparedness: The process of preparing for an exit is intensive and often underestimated by executives, leading to missed opportunities for maximizing value and achieving successful exits.

Approach

Themos outlines a strategic approach that executives must follow to thrive in the private equity environment:

1. Mastering the Seven Levers of Growth

The foundation of a successful exit lies in understanding and executing on seven key growth levers:

• Customer Acquisition: Increasing the number of customers who are exposed to the product or service.
• Conversion Rate Improvement: Optimizing the percentage of prospects who convert into paying customers.
• ACV (Average Contract Value) Growth: Increasing the value of each customer contract by upselling, cross-selling, and bundling products or services.
• Customer Retention: Ensuring that customers stay with the business for longer periods, which increases lifetime value.
• Lifetime Value Enhancement: Maximizing the revenue generated from each customer over their lifetime.
• Cost Management: Keeping customer acquisition costs (CAC) and operational costs low while scaling the business.
• Profit Margin Optimization: Ensuring that profit margins grow alongside revenue, improving EBITDA and overall financial performance.

Executives who master these levers can drive substantial growth, making their businesses more attractive to PE firms and future buyers.

2. Thinking Two Exits Ahead

A critical part of Themos’ strategy is teaching executives to think beyond their immediate exit and consider the subsequent exit that their PE firm will pursue. This approach requires executives to:

• Forecast Future Market Opportunities: Understand not just the current growth potential but also how the business can expand into new markets or acquire complementary businesses to maximize its future value.
• Leave Room for Growth: Ensure that the business is positioned for continued expansion, which will make it more attractive to future buyers and justify higher multiples at exit.

3. Focus on Cash Flow and EBITDA

In the current market, Themos notes that there is a shift from focusing solely on growth to placing greater emphasis on EBITDA and profitability. Executives must be able to balance growth with strong cash flow management to appeal to PE firms looking for value investments rather than speculative growth plays.

4. Aligning with the PE Investment Thesis

Themos emphasizes that successful executives must align their actions with the PE firm’s investment thesis. This means understanding how the PE firm plans to exit and ensuring that the business is structured to support that exit. This alignment requires a clear understanding of the strategic goals of the firm and the ability to execute on a plan that moves the business toward those goals.

5. Executing a Plan for Hyper-Growth

Themos notes that the hyper-growth phase is one of the most rewarding periods for executives. However, this phase is also the most challenging, as it requires the business to scale rapidly while maintaining control over costs and performance metrics. Executives who can effectively manage this phase are well-positioned for successful exits.

6. Preparing for an Exit as a Second Full-Time Job

The exit process is time-consuming and complex, often requiring the executive team to treat it as a second full-time job. From preparing pitch decks and financials to meeting with potential buyers and managing due diligence, executives must be fully committed to the exit process. Themos advises that this preparation should begin 12 to 18 months before the planned exit date.

Results

Executives who follow Themos’ strategic approach see significant success in private equity, as evidenced by key outcomes:

1. Sustained Growth: By focusing on the seven growth levers, executives are able to drive consistent revenue and EBITDA growth, making their companies more attractive to buyers.

1. Strong PE Alignment: Executives who align with the PE firm’s investment thesis are more likely to stay in their roles throughout the lifecycle of the investment and share in the equity gains at exit.

1. Successful Exits: The focus on preparing for an exit as a second full-time job ensures that executives are well-prepared for the complexities of the process, leading to smoother transitions and higher exit multiples.

1. Learning and Personal Growth: Executives not only achieve financial success but also experience significant personal and professional growth as they navigate the demands of the PE world.

Conclusion

Private equity presents a unique opportunity for executives to achieve substantial financial gains through successful exits. However, success in this field requires a deep understanding of growth levers, alignment with PE firms’ investment strategies, and a willingness to embrace the intense performance expectations that come with PE ownership.

Themos’ strategic approach, which focuses on mastering growth levers, thinking two exits ahead, and preparing thoroughly for the exit process, provides a clear roadmap for executives looking to thrive in the private equity arena. By adopting these strategies, executives can maximize their potential for life-changing equity payouts and long-term success in private equity.