It’s a no-brainer that private equity firms are often seeking a profit boost in their dealings. One way of proceeding is to acquire companies with the aim of exiting at a higher total equity value that is more than the initial investment. How Private Equity Can Grow the EBITDA of their Portfolio Companies through Pricing
Since increasing the portfolio value as quickly as possible is a large focus – say, between 5 to 7 years – many PE firms have mastered the art of pulling multiple levers to achieve this goal.
Some of the areas successfully explored to enhance value include cost reduction, product/service fit, operational transformation, financing, supply chain optimization, and talent upgrade.
However, there’s one area with tremendous value and high EBITDA leverage that many private equity managers usually underuse– that is pricing.
Pricing: The Easiest and Highest EBITDA Multiplier Tool of Private Equity
EBITDA is one of the more commonly adopted KPIs investors use to assess a company’s value. Simply put, it is a measure of profitability that shows how much cash a business is generating before it pays its debts.
Knowing that EBITDA is the key driver of business evaluation, it becomes essential for a private equity firm to concentrate their efforts on that driver that has the greatest EBITDA leverage to maximize their investment returns.
Studies of over a thousand private equity firms revealed that improvement in pricing – that is, the selling prices of products and services – has an exponential effect on EBITDA far more than reducing costs.
Implementing Pricing to Drive Growth of Portfolio Companies
Many of the companies PE firms usually invest in are typically underperforming ones that come with considerable challenges and well… opportunities.
Even if pricing seems like a quick win, there is need to proceed with caution because underlying the quick wins are different muddled value propositions and pricing strategies.
As most PE’s management members aren’t pricing experts and may not know how to capture the full pricing opportunity methodologically, pricing experts may have to be invited onboard.
Instead of basing a portfolio company’s pricing strategy on skewed recommendations from the sales teams and cost-plus tradition, The Consultants bvba can work with the team members to accurately diagnose and execute an efficient pricing plan for best results.
This helps to extract the highest profits possible, effectively contain the majority of the spillover risks of pricing and make the initiative effortless to the portfolio company. The private equity team now acts as the catalyst to facilitate and implement the pricing program.
For a mid-manufacturing company, the typical lead-time for pricing to take effect is about 6 months. Faster than both operations and sales performance programs.
Warren Buffet, once said,
“The single most important business decision in evaluating a business is pricing power. If you can raise your prices and not lose business to competitors, you have a solid business.”
Now, consider when pricing performance improvement is directly connected to sales effectiveness, operational excellence, and technology. Three things happen…
- A capable sales force will use best practices, structure, governance, and processes to convey customers’ feedback throughout the organization, which drives up customers’ willingness to pay.
- Operations running without defects reduce lead-time, increase quality in both production and delivery. This also increases consumers’ willingness to part with cash.
- Technology and digitalization can utilize data efficiently, making it possible to get helpful insights and deliver value. The data becomes an important factor in pricing improvement.
When an initiative takes place on either the sales, operations or technology/digitalization level, the improved environment significantly contributes to price optimization.
How Private Equity Can Grow the EBITDA of their Portfolio Companies through Pricing
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“Boosting your Business Performance is our Passion” The Consultants bvba is an advisory and In-house expert company focusing Pricing, Commercial excellence & Business Transformation.
Author Baydhir Badjoko, Managing Director at The Consultants bvba, https://www.linkedin.com/in/theconsultants
Private Equity Portfolio Company EBITDA Boost: Silver Bullet