When M&A activity is hot, deals move fast. It reminds me of the housing market a few years ago, when people were buying homes after a five-minute walkthrough or sight unseen via staged realtor pictures. Likewise, private equity investors were closing portfolio company deals with only a couple weeks of due diligence. In both cases, there wasn’t time to really understand the true value of the purchase.
But today’s market looks different. We’re seeing slower activity, longer hold periods, and fewer bidders at the table. Just like homeowners who stop moving and start renovating, private equity teams are using this time to understand the fundamentals of a potential portfolio company before investing. What they’re finding is that pricing is one of best levers to pull to increase both EBITDA and a company’s multiple.
PE leaders and analysts are plenty smart enough to know how pricing can improve valuation, but they can be restricted by fears of making the situation worse. This is especially true in uncertain times. Leaders are concerned that a price change will alienate one or more of the following: Portfolio company CEOs, their sales leaders, or their customers.
When the market doesn’t support “flipping” the portfolio company though, overcoming these fears becomes even more important. The keys are understanding and communicating your value. Internally, that means doing the work to truly understand the company’s value to their customers. How they help their customers increase revenue, decrease cost or minimize risk. Helping a portfolio company CEO quantify what they do for their customers is crucial.
Next is convincing the sales team that they won’t lose customers. This requires building their skill and confidence via value messaging, buyer type diagnosis and just plain practice. When you’ve accomplished this, the implementation with customers becomes much easier.
Imagine, improved pricing, a more capable sales team and a higher company valuation.
Just like a kitchen remodel, though, these changes can’t be made minutes before putting the company on the market. In order to create a elegant and sustainable pricing strategy, leaders must sharpen your segmentation, codify your pricing logic, and give your sellers the tools to hold the line. If your team can’t explain why a customer pays what they pay, or how your pricing ties to value, you’ve got work to do.
The market may be volatile, but pricing is the kind of work that puts you in control. It turns uncertainty into advantage, and it gets you ready to move fast when the market opens back up.
Let the others wait for tailwinds. You’ve got renovations to make.
