Insights

Small Business Private Equity



Improving Small Businesses



This week’s issue of BusinessWeek has a good article about how Monomoy Capital Partners, a private equity firm, uses operational improvements to improve underperforming companies.

http://www.businessweek.com/articles/2012-04-26/my-week-at-private-equity-boot-camp#p1

Despite the misleading cover, the article details how Monomoy rapidly implements lean manufacturing practices (based on the Toyota Production System) through a series of management “boot-camps”. Monomoy’s goal is to make their companies more efficient – to use less capital to produce more goods or services. Capital includes hard capital like equipment, fork lifts, and buildings; working capital like inventory and receivables; and human capital or payroll. When less capital produces more goods, profits rise and cash flow increases, resulting in increased value for Monomoy.

Hadley Capital has the same end goal – increasing the value of our companies. But, because we focus on small companies, we tend to take a different approach to achieving the end goal. First, we tend to buy high performing businesses so we apply a “first do no harm” approach to our early periods of ownership. Later, we work directly with management to design and implement 1–3 strategic initiatives per year. These strategic initiatives may focus on operating efficiencies, much like Monomoy’s, or improving sales force management or developing new market strategies.

As the article suggests, improving any small business involves a solid plan, a focus on results and a lot of hard work. Hadley Capital works in partnership with the management teams at our companies to design and implement plans for improvement. And so do a lot of other private equity firms. The notion that private equity buyers are simply slash-and-burn owners is worn-out; the days of buying bloated companies, streamlining and then “flipping” them are long gone. The BusinessWeek article does a nice job of capturing one private equity firm’s modern value creation strategy.