Despite uncertainty still lingering at the start of 2025, dealmakers are looking ahead, setting their sights on big exits and an active market. Zorian Rotenberg, Operating Partner at Charlesbank Capital Partners; John Broderick, Operating Partner, Argosy Private Equity; and Doug Brookman, Managing Director, Mesirow Capital Markets joined David M. Toll of Private Equity Career to share their perspectives on how dealmakers can navigate the current landscape and ensure successful exits in 2025 and beyond. In the current complex market, maximizing exit valuations will require strategic development of key functions, an understanding of the political climate, and using data-driven insights to act at the right time.
All eyes are on how recent geopolitical changes will affect the markets. But expectations continue to be optimistic. Doug revealed he expects a wave of transactions to hit the market in Q2 and beyond saying this will happen, “once we have more of an understanding of how some of these changes in government are going to impact businesses.”
The panel agreed that the effects of the shifting market dynamics should be leveraged to create high-quality businesses. Zorian shared, “While everybody's always excited about exits, you cannot really control the result or outcome. As a private equity firm, what you can control is a building quality company.” Buyers want to see businesses that can withstand the evolving economic climate, so efforts should be put towards building a high-value company, not just optimizing for an exit.
Each expert pinpointed growth and development in go-to-market functions as essential for creating value. John highlighted the importance of “focusing on brand, lead generation, conversion, pipeline management, business development talent, and then of course, having the data and the results and the performance to back it up.” But he emphasized this can’t be left to the last few months, saying, “If you're trying to add value in the last few months, that might be difficult. Ideally, you start working on an exit two years in advance — where many of your initiatives at the portfolio executive leadership team are preparing and positioning the business for an exit.”
The panel shared actionable strategies to align sales, product, and marketing initiatives to create a compelling growth story for LPs. John pointed out that AI and automation application are valuable in all areas of the business to make the people and every function more efficient, saying, “We're creating bandwidth for human capital.” Data-driven decisions are now essential for businesses to scale key processes apply real-time insights to timely opportunities.
For dealmakers looking to stay ahead in 2025, these insights provide strategic guidance and potential traps to avoid for a refined exit plan to see the best possible valuations. Watch the full webinar to explore more on how to maximize your exit opportunities in a competitive market.
Transcription:
David Toll (DT): Good morning everyone. My name is David Toll, and welcome to a special Private Equity Career News and Private Equity Professional professional webinar. Our topic today is Unlocking Value Strategies to Maximize Exit Valuations in 2025. So again my name is David Toll. I'm the publisher of Private Equity Career News. And I will be your impresario for today's program. I'd like to start out thanking our sponsor, Sourcescrub.
They are the leading deal sourcing platform for rainmakers who want to see more deals, win more often, and get the most out of their investments. We're going to start off with a few housekeeping announcements. First, a friendly reminder to any reporters on the line that we are off the record. So if you'd like to use anything our speakers say today in a story, make sure that you check with them in advance and get their permission.
Second, you can download a copy of slides for today's program. You do that from the handout section and you get there at the top of your screen. There's an icon that looks like a piece of paper with a paperclip attached to it, and you can download a copy of the slides. You can also get a copy of the results of a 2023 survey that we conducted.
Our business development professionals and private equity. And it includes some valuable information on industry best practices in business development. Later today, I will send everybody a copy of the recording of today's program. So no need to take extensive notes unless you really, really want to do that. And finally, many of you asked really good questions when you registered for the program.
We do plan to address those questions during the roundtable portion of the program. Also, feel free to ask questions at any time during the program. You can do that through the question feature. Again, go to the top of your screen and you should see an icon looks like a screen with a question mark in it. And that's where you can ask questions.
We'll also leave around the last 10-15 minutes for pure, pure Q&A with the audience. Okay. I'm grateful to have three expert speakers today. All of them, friends of mine, to guide you through the topic. As John Broderick is an operating partner at Argosy Private Equity, he's located outside of Philadelphia in Wayne, Pennsylvania. Doug Brookman is on the other, coast out in Los Angeles.
He's managing director at Mesirow Investment Banking and works with, financial sponsors on south-side transactions. And Zorian Rotenberg is an operating partner at Boston-based, buyout firm Charlesbank Capital Partners. So I'd like to ask each of my speakers to tell us a little bit more about their firms and themselves. John, let's start with you.
John Broderick (JB): Yeah. Thanks, David. John Broderick, a partner at, Argosy private equity as David mentioned, we’re based right outside of Philadelphia. We're presently working out of our sixth fund. And we expect to kick off our seventh fund, later on, in the first quarter of this year. We focus on the lower middle market, and we're often the first institutional, investor.
And you can imagine there's, typically a great deal of professionalization and value creation, that we try to capitalize, using a, a methodology, a value creation methodology. That's modeled after Toyota and Danaher Business System, which I'll cover, later on, with a few slides. Happy to be here.
DT: We are happy to have you, John. And let's go to Doug. Tell us a little bit more about Mesirow Investment Banking and your role there.
Doug Brookman (DB): Sure. Doug Brookman, I'm, again managing director here in the investment banking group at Mesirow. We're a Chicago-based investment bank and financial services organization. You know, primarily spending time in the middle market, businesses between kind of 5 and 25 million of EBITDA.
I work directly with private equity firms and our partners on the sell side. Covering ten industry verticals. I would say that half of our deal flow is primarily founder/owner. And then the other half is private equity-backed sell sides. It's it's great to be here with you guys today.
DT: Super. It's great to have you, Doug. And, so, Zorian, tell us, tell us a little bit more about, Charlesbank Capital Partners and what you do there.
Zorian Rotenberg (ZR): Yeah. David, first of all, thank you for having me. It's great to be here. I'm Zorian Rotenberg. I'm an operating partner at Charlesbank Capital Partners. It's a middle-market buyout firm. We have, portfolio companies in various different industries.
But I work in the tech fund. Focused primarily on software. And we have software companies that, you know, have revenue going, you know, well above a billion. My focus, by the way, my focus is on, both due diligence and identifying, value unlock opportunities. But importantly, which is applicable to this webinar, identifying ways to maximize value for portfolio companies.
My career started in investment banking and in investing. And I've also been an operator with, you know, responsibilities, running global revenue and commercial side. So hopefully a lot of what we'll talk about today, we'll, we'll include that as insights for the listeners.
DT: All right. Zorian, it's great to have you. And, now I'm going to pass the baton on to, John Broderick of Argosy Private Equity.
He's got some really interesting slides with some, insights into exit readiness and value drivers. So let me turn it over to John.
JB: Yeah. Thanks again. David. Next slide.
So this is, you know, a high-level overview of our value acceleration methodology. Again, this is modeled after the Toyota production system, Danaher Business System. It's a set of best practices that we offer up to our portfolio. These best practices are broken up into five pillars. Strategy, human capital growth, lean manufacturing, and lean enterprise. This is not a prescriptive business, operating system.
It's an offering. So part of my job is to introduce these best practices.
To each executive as early, as, during diligence. But certainly, during our hundred-day planning, with, with each new port co, the, the real key here is for us to build trust and then for us to kind of share these best practices in a variety of different ways through summits, through learning opportunities, through webinars.
And our third-party network. Also, practices. These same kind of, best practices. So, anyway, this has been very successful and recently we've built, an exit readiness and value driver, tool, which again, we offer up to our portfolio, part of, one of our cooler calling cards is we're very transparent, and, open with our, executive leadership teams.
And, you know, early on, we talk about our investment hold period. And, you know, just preparing, making, making a, an executive leadership team, a CEO, a CFO, aware of what drives value, in an exit for, you know, 4 or 6 years later. Next slide. These are a few excerpts.
Next slide, David. Yep. Thank you. So this this the next few slides are a few excerpts from from this tool. So you can see here, three, pillars. You know, value driver pillars, business drivers, which is recurring revenue could be customer churn, market share, win-loss ratio. And again, there's a bias here, which Zorian, will speak about later is Argosy is a growth-oriented, private equity group.
We are not cost-cutters. We plan, on the front end to double revenue over a five year period of time. So that's the kind of the basis of our investment, thesis. Customer drivers. Voice of customer is very, very important. We use voice of customer to build our strategic plans.
Very early on in our, whole period. That's also part of our 100-day plan. Will, will, we will hold, 1- to 2-day strategic planning sessions with the executive leadership team where we're, rolling out our diligence findings or sharing our investment thesis. And what we're trying to build is a consensus on where we want to go the next 3 to 5 years.
And then lastly, value structure, and some pillars around that or some components around that is margin profile increase and strategic pricing. The next slide is taken from Lincoln International. And this is their overview of value drivers in the private equity community, and you can see here there's company-specific qualitative factors, there’s company-specific quantitative factors, growth, and then market factors.
The next two slides are quick overviews. And again these are very simple. What might come natural to a private equity professional. What we find in the lower middle market is that our executive leadership teams, although this might be simple and straightforward. This is really educational for them. And the earlier that we can get them to think about what will really create value during an exit, the better off they are in building strategic plans that will add value 5 years down the road.
And then the next slide is just the exact opposite. These are detractors to value. So slim margin profiles. One-off projects. No growth over the last 2 or 3 years. So we'll get to this later on in our, kind of in, in the webinar. But, these are just, some examples of what we share, with our portfolio.
DT: Super. John. John, could I ask you to, just go back a few slides and expand a little bit on the voice of customer and what exactly that is and what it means?
JB: Yeah. So voice of customer. Naturally, from the term, you think about listening to the people that buy your product or service. We've expanded that.
We consider that a 360 around the business. So it's customers, it's suppliers. It's employees and it's shareholders. So what we do is we collect those voices okay? And if you think about it, relative to strategic planning, if you're collecting facts from those four entities that surround the business, that make up a business, right, their employee base.
We find it's very, very easy to start building fact-based, meaningful strategy based on that, on those voices. Now, just like everyone else, we use SWOT planning as well. To complement this, we have another tool which we call “4 Ups!,†which is a thought-provoking tool that we also use in strategic planning. But what we find in facilitating these strategic planning sessions with a, with foundation, from voice of customer, we find that our strategic plans are often, really meaningful and impactful to driving a business forward.
DT: All right. Good stuff, John, and I appreciate, appreciate your going through these slides. The slides, by the way, are available for download right now. Just go to the top of your screen. You'll see an icon with a piece of paper and a paper clip. And of course, you can follow up with me, dtoll@privateequitycareer.com afterwards if you don't get them during the program.
Okay. Before we get into the roundtable discussion, which I'm, really looking forward to, I want to try to take advantage of the large crowd of people that we have on the program and ask a polling question. So let's see how this works. The question we'll be asking is, how do you expect your firm's total number of exits this year to compare with 2024?
So launching a poll. Go ahead. And, go ahead and make your selections when about half of you have responded, I will end the poll and share the results. So again, the question is how do you expect your firm's total number of exits this year to compare with last year 2024?
Okay. A number of you have voted, so I'm going to end the poll and share the results.
And let me ask one of my speakers, John, can you see the results?
JB: Yes.
DT: Okay. So I assume everyone can see them and, well, you can see, tremendous amount of optimism, for the exit market this year. And almost half of you expect, the number of exits this year to be, up slightly to 10%.
A quarter of you expect, the number of exits to be up even more than that. And, almost nobody expects, to be doing less exits this year than they did last year. So let me close the poll. And, all right, now let's get into, get into some questions. We're going to start off with some more general market overview types of questions.
But pretty quickly we're going to get into some of the nuts and bolts of how do you actually, in the last year or so, generate, additional value in, portfolio companies and really set the stage for, lucrative exit so that that's really what this program is all about. But before we get there, I am interested in just how strong, the exit market is right now.
Seems people on this call are very optimistic that it's, that it's that it's strong. But I want to hear from the experts. So let's start, and remember, we have an investment banker, and, and then two operating partners. So let's start with the investment banker that sees both sides, buyers and sellers, and sees quite a bit of deal flow.
So. So, Doug, how strong is the exit market right now? And how excited are you by the opportunities?
DB: Yeah. So I think things really come down to the quality of a business at that point. If you have a quality business with strong margins, growth, and all the things that John was alluding to, in the positive slide as to what leads to a successful exit, I think those businesses fly off the shelves because the lack of quality out there in the market, you know, is really drastic.
You know, with that being said, you know, we personally are holding on to some things to launch likely, you know, for the next several weeks until we get a handle on what's going on in the political tariff. You know, geopolitical environment, at this point. We're relatively optimistic that it's going to be a really strong year. I think things are going to be backloaded, though.
And you'll start to see, a larger wave of transactions hit the market, you know, in the Q2 and beyond. Once we have an understanding or more of an understanding of how some of these changes in government are going to impact businesses.
DT: And, Doug, I wonder if you would just expand a little bit or go a little bit deeper into what, what you're waiting to see from the administration and, sort of the geopolitical landscape, like what, what needs, what needs to settle out and how, how is that going to impact businesses?
DB: Right. So, I guess from a geopolitical perspective, you know, for instance, we have a business that we're mandated on currently that is in the, that spends a lot of time in imports, and they're importing from Asia, they're importing from Africa, they're importing from the Middle East. And, you know, freight rates in those regions have gone up drastically because of the war in the Middle East.
You know, pirating in the Red Sea, all of these issues have created, undue pressure on a lot of businesses because of those container rates. And what's going on. That sounds pretty simple. But, you know, when you're talking about a $10 million of business and freight rates triple, it becomes a meaningful impact to the overall business.
So from a geopolitical perspective, I'd say that's probably one of the biggest, from a governmental perspective here in the States, you know, two weeks ago, I guess it was now we had tariffs on and tariffs off on multiple countries in a 24-40 hour span. So until we can understand kind of what is going on there and what those impacts are, what's excluded, what's included, you know, we're sitting on the sidelines because as an investment banker and I'm sure representing private equity firms, you know, we don't want to go to market and then have some hammer get thrown down where there's a 25% or a larger tariff that impacts the businesses, where all of a sudden that 10 or $15 million even of business has to then try to pass through those costs to customers.
We're only working in a potentially 4- to 6-month, 7-month window to get a deal done. It's really hard to pass those through to customers in that short period of time and really defend against what the impact to the business would be.
So, you know, we're sitting on our hands here for a couple more weeks, and this is more of a personal view, not a Mesirow view. But realistically, you know, I personally believe that we'll have a relatively good understanding of what's going on here over the next 6 or 8 weeks, because they're going to try and rip as many mandates off as they possibly can at the government level and then execute on those, you know, on those, on those strategies or on those, you know, work streams.
So that that's my view. And I think there's a lot of folks that would agree with that. You know, that's that's how we're thinking about things currently.
DT: Okay. That's great, Doug, and thanks for bringing it home with an example that really, illustrates what's what's really going on out there. John, what about from the perspective of yourself and Argosy Private Equity? How strong do you view the exit market?
JB: Yeah. Oh, well, I mean, timing is everything, right? So I would, I would, I would pile on to what Doug said, like, we're, we're looking for 2 to 3 years of positive growth, to consider an exit. That's the most important thing, right? For, for us to really display, a business and, and make it, you know, attractive to, you know, a new owner or a strategic is we want to demonstrate that top-line growth, and we're willing to wait.
So we are one of our core values is although our, initial targets are always a 4- to 6-year hold period. We've held businesses for 8 and 10 and 12 years, and, we've had great returns when we do decide to exit. So I think quality businesses again, exactly what Doug said. They are in strong demand and, it's the same thing when we're contemplating an exit.
You have a, you know, a strong business, good management team, professionalization, and ops. You know, a strong foundation for growth. And then your, the commercial side of, of that business is attractive. You're typically looking at an attractive, exit for your shareholders.
DT: And John how large roughly is your portfolio, how many active portfolio companies do you have?
JB: Yeah. So, we're up to 34. But again, we've been we've been putting funds 6 to work. So we have, probably about 18 of those businesses are from our newest fund. So they're often in the middle of their hold period, if not in the infancy of that. So we're we're at the last thing I would say is that we're very motivated to move and position our companies for an exit because LPs are eager to see returns.
And so when we're in fundraising, you know, we have repeat LPs that are looking to get returns from the last fund that they invested in. And I think that that's widespread, that that kind of position and those feelings are widespread within the PE community.
DT: And, John, can you also speak to some of the concerns Doug brought up that has, things sort of, you know, in a bit of a hold period because of the uncertainty over tariffs and geopolitical issues impacting your portfolio.
JB: Well, I think in general, there's a lot of uncertainty. Again, I'm repeating what Doug said. A lot of people are waiting for the new administration for things to maybe, stabilize, if that's, possible or become a little bit more predictable. And, I think that that's creating a lot of unrest. But we're still very early on in the administration.
And I'm optimistic about, you know, things settling down or finding it's, it's sweet spot. We've looked at businesses, that will capitalize on global supply chain dynamics. We have, hold, hold it, hold positions. We have a few port co's that, I believe will capitalize on some of the dynamics that are going to occur, due to global trade and, you know, geo movement of manufacturing and supply chains and things like that.
So, yeah, there's there's always a, an optimistic, view, of, of the external environment. So that's what we're thinking about, as well as mitigating risks to other port co's.
DT: And, John, just remind the attendees of the kinds of industries that those 34 companies are operating in. Manufacturing, I take it?
JB: We hold positions in manufacturing, building services, supply chain.
We've done a little bit of franchising, so we're, we're generalists. We're opportunistic. Yeah. So those those are our positions, some building products, port co's historically as well.
DT: Thank you, John. And, Zorian, same question for you. And maybe speak on your own behalf or, or Charlesbank's behalf. One, your view of the exit market, just how excited you are by opportunities to sell companies.
ZR: Yeah. So I guess I would say I personally, I'm always wary of of claiming that I have a crystal ball. So while the market dynamics do look appealing and I agree with with Doug and John here, I think that having no crystal ball and no ability to predict the future, and I'll be the first to admit that I'll first refer to some data that we know that is out there.
And kind of we can we can go from there. So I think everyone here has read the Wall Street Journal article just a couple of days ago. And, they basically talked about private equity firms sitting on more than $3 trillion worth of companies that were bought at the peak of the market in 2021, when interest rates were lower.
And this is according to Bain and Company data. And a lot of private equity firms are holding on to them because they don't want to accept lower valuation options. This is all, suggesting that there's certainly a tremendous amount of pent-up demand and there's pressure on realizations. And when a lot of deals do come to market, there's obviously competition, tremendous competition, right, to make exits successful.
This is also in the context that interest rates are still pretty high. So both for, sellers to pay off debt and for buyers, to raise debt to make deals. At the same time, you know, there's research that the periods, the holding periods are extended from 5 to 7 plus years. So there is this dynamic and I and I cannot tell you exactly, what the year may look like, although again, it does look attractive.
I think this brings us to you ask me a question about whether I'm excited about exits. I think everybody's always excited about exits, but I think that the bigger, idea here is that, you cannot really control the result or outcome. What you can control as a private equity firm is kind of building a building quality company, right?
The effort you put into, after you sign the deal and focusing on building, great companies, quality businesses, which can mean a lot of things. And, if you want to talk about that, in a moment, I'm happy to chime in, but, I'll pause here.
DT: Yeah, we're coming to that Zorian and, so just, just hang in there and we're going to, we're going to talk about the nuts and bolts of adding value to, to portfolio companies.
Before we do that, John, you mentioned, that 18 of the 34 portfolio companies are in your are in your most recent fund. You're obviously a buyer in this market. Are you are you a seller in this market? The other 34. Can you give us some feel for your selling plans?
JB: Yeah, I sure can.
I, I, you know, with Argosy, our outlook for 2025 is that we're actually, you know, if we compare it to the last 3 years or 4 years, we're going to be down, most likely, with the number of exits that we have. But we do have our eye on 2026. So that is our outlook. And again, we are very motivated, to start, you know, continue or start working with companies that are two years away and again, you know, educating them and then, having aspects of their strategic plan, to build, you know, those, you know, those high quality, the high-quality profile for an exit.
And that, includes, you know, business analytics, talent, depth, right? We're all looking, especially operating partners. We're looking for high-quality, talented teams and cultures. Because value creation starts with people, right? We're looking for technology stacks that are built out and make the business more efficient. So, yeah, our outlook for 2025 is not, extremely strong relative to the last 3 or 4 years, but, 2026 and 2027 will be back on track as far as exits.
DT: And, John, the fact that you're looking to, a couple of years out, 2026, 2027 for like big exit years. So does that have to do with just where Argosy is in the investment cycle, or is it more related to some of the macro factors that Doug was talking about earlier?
JB: I think it's both. But it's really has to do with like, Argosy's portfolio because, you know, as recent as last year, we, we exited some really high-quality businesses, exceeding our expectations, during an exit.
So again, it goes back to what we talked about earlier, the good quality businesses, they're in strong demand still, right? So but but, you know, to answer your question more succinctly, like it's more about our portfolio at this moment in time.
DT: Okay. And, all right, so let's, let's get into the heart of the, the topic here, which is what the kinds of things that you can do, strategies that you can, conduct to actually generate additional value in the final year or 2 of ownership of portfolio companies.
John, you had a great slide that, sort of helped business owners understand the perspective of buyers and investment bankers. And you show that to them early. So I wonder if you would go into just a little bit more detail about how you look at a business through the lens of a buyer and what kind of adjustment you can make during the final months of ownership to, improve, the company in the eyes of the buyer?
JB: Well, the latter half of your question is a little bit harder. You know, if you're if you're trying to add value in the last few months, that's that might be difficult. I think you can start working on an exit like 2 years in advance. That's really ideal. Where again, many of your initiatives at the portfolio executive leadership team, they're preparing and position in the business for an exit.
And that goes, that could include building out a data room that could be, you know, queue of work that's done prior to an exit. That could be filling out, a management team. Okay, it, but in the end, what we have recently, and this is the last 2 or 3 years, we're really focusing on building commercial engines.
And again, that's a process, that's technology and people. But also to have the metrics of having a business that is growing, having a really strong value proposition, right, that you're able to communicate, during an exit. That's what we look for when we're looking at a business. Right? So, we're, we've really started to focus on sales and marketing.
And that's been one of our weaker areas, during, you know, kind of our value creation years. And, you know, focusing on brand, lead generation, conversion, pipeline management, business development talent, and then of, of course, you know, having the, the data and the results and the performance to back it up.
DT: And, John, when you say commercial engines, that's a phrase I'm not too familiar with.
Like what? What do you mean by a commercial engine at a port co?
JB: Yeah I, we, we look at that as you know, sales and marketing right as functional areas. And we've built out, you know, a variety of different tools that we offer up to our, portfolio businesses. And more often than not, our general playbook during our hold period.
And this is in, in, in an ideal situation, right? Because we all know that, you know, there's a lot of bumps, and surprises along the way, but typically our strategic planning is to build a really strong, what I would call OpEx foundation and that is HR, IT, finance, and accounting, marketing, manufacturing, purchasing, so on and so forth.
Build a really strong OpEx foundation and position the business to now move their resources and their attention to growing top line. So we're we have the appetite, we have the stomach to often invest and therefore, EBITDA might take a hit in years 1 and 2. When we do that effectively, we're capitalizing on those investments and that strong OpEx foundation in years 3 through 6.
DT: And John, you mentioned that it's only been recently that you've put more emphasis on sales and marketing, brand, lead generation, conversion pipeline. And I'm just wondering why. What that is a function of? Why make that shift recently?
JB: Well, it's not necessarily. Well, I wouldn't call it a shift. I would call it self-reflection on our value creation, you know, the operating partner program and we, we all have a background in operations, right?
Versus, having commercial leaders. Okay. So we identified that as kind of a weakness or, maybe a blind spot, even though historically we've grown, right, our portfolio has grown. But from an operating partner, value creation, point of view, we just, concluded that we weren't skilled. We didn't have the service network that was built out and mature to the point where we could really lean into and help and kind of springboard portfolio companies.
So, again, it goes back to voice of customer. Like we listen to our portfolio and they identify this as, you know, something that we can improve. And therefore that's what we've been leaning into. That's where I've been spending my time over the last 2 or 3 years.
DT: Okay. Super. And, sales and marketing are big areas of expertise for Zorian.
So let's, let's turn to him and for this question for Zorian on how, you know, maybe start with sales and marketing in the last couple of years of ownership, what are some adjustments to make, to improve companies in that area? And then feel free to take the question wherever you want in terms of value levers.
ZR: Yeah, for sure. So, a couple of things. To me, it's it's not just sales and marketing. It's it's much more strategic and bigger picture. It's really overarching commercial and building on what John was saying, I wanted to introduce a point that a lot of times in private equity, you hear about operational improvements as a key value driver.
And I would argue that it's not just operational improvement, it's actually much more than that. It's commercial improvement and operational improvement together. Because operational improvement is just part of it. But commercial improvement, which we sometimes refer to as go-to-market in private equity, it's about accelerating revenue growth profitably and capital efficiently. And that includes operational improvements and doing or focusing on growth that is, profitable, right?
And efficient. And as part of that, I also wanted to mention that obviously the title of this webinar, we're talking about maximizing exit and valuations, and in that context, I wanted to mention a couple of, data points. One is, well, actually all of them are just really about what are the, you know, highest impact drivers on valuation.
There's a ton of research. For example, Michael Mobius in investment management research at Morgan Stanley concilient research, knows, sales growth is the most important driver of corporate value. There's a ton of research on that. Additionally being Hugh MacArthur, who recently spoke about how in private equity, 50% of value creation is from revenue growth.
There's a recent statistic from Ameritech, an investment firm that, I'm looking at here that, growth is responsible. It's a dominant factor in corporate valuations. And in their research, they found that to be 3x as impactful as just free cash flow. And all of those are important, right? But let's put it this way.
Growth and especially revenue growth, not just sales and marketing, but the entire revenue and top line it's critical for valuations. So going a little bit deeper into that in terms of exit valuations, I would want to share that one of the best ways to think about maximizing this value, besides just thinking about, what are the key drivers of that is, how do buyers look at your company?
And we all know what it is, right? It's, you know, attractive markets, large markets that are also growing or the company's growing within its market. And expanding rapidly. Strong management teams, unique value proposition, and differentiation, competitive moats. The top three positioning differentiation, good customer value, and return on investment for customers drives a ton of value.
You know, expansion, sales, share, wallet, retention, gross net, etc.. And by the way, there's a lot of it applicable to technology buyouts. But that also applies to any company that has revenue, which is any business with commercial, industrial supply chain services. You know, companies with solid business models, solid go-to-market, obviously financial health, etc.
But I would also suggest that a lot of those are driven, by the kinds of things that a private equity firm can do from the commercial side, commercial improvements and operational improvements to create a much more quality business and much more or maximize the value of the business, like all of those things. So, for example, larger market or a growing market for the company with a company can be much more effective at growing its business within its market and, acquire and go into adjacent markets, right, and be more effective at the white space and green fields.
So all of these things can be actually effectively affected by the private equity firm working in alignment and collaboratively with a portfolio company management. Same thing on the product side of a quality product. It's about how well you can have your portfolio company, lean into that, go to market, operational efficiencies, etc., all of the above.
So to wrap it up, I would say, yes, sales and marketing are certainly part of that, but at a more strategic level is just commercial value creation. And it's revenue growth. And the key factors that drive valuation are well known to us. So if the private equity firms are focused on that and also not in the last stretch of your, harvesting period or exit planning, but actually, if if most companies think of exit preparation starting on the day you sign the deal, which really means not exit preparation, but synonymous to that, maximizing the value of the of the business that you're you've acquired or building, creating a value maximization or value creation plan that is effective and sort of continuously improving it.
If you're doing all of those things as a private equity firm, at the end of the day, going back to what I said earlier, you cannot control the exit. But you can control the effort and the activity you put into it over the holding period. Kind of goes back to Bill Wolf's book on the NFL.
The score takes care of itself, right? Put in the right effort and have the right strategy and execute on it. And the score will take care of itself.
DT: All right. Good stuff, Zorian. Doug, I want to turn to you. And from your perspective as an investment banker, what are some of the most common missteps that you see private equity firms take in the final few years of ownership?
DB: Yeah. I mean, look, we, we've dealt with some, I would say, significant issues within, you know, private equity backed businesses trying to sell them. And I would say that you know, to Zorian's point, the, you know, the quality of these businesses, how they're going to market, the management teams, you know, how strong everybody is. Those are obviously the most paramount.
I think the things that really, that really stifle a process, you know, or, or can hinder an exit or, you know, wholesale changes right before you're about to exit. You know, you've got major, major, major transitions that take place. And maybe things are working for a few years as you were, you know, transitioning a business from either founder ownership or prior sponsor ownership.
And then maybe things stop working and you're into five, 6-year hold periods, and then you try to bring in a new management team or a new CFO or, you know, new sales teams, or try to do the Hail Mary and bring in, you know, additional new sales folks who have come from the PD organizations, you know, to try and that try and, you know, pop up growth real fast before you go to exit.
Those things are all sussed out really, really quickly. Maybe not at the teaser stage, but definitely pre-MP. So, you know, some of those, some of those items, you know, are, are definitely, you know, I would say maybe not great ways to approach and exit. You know, sometimes it works great, but I would say oftentimes it doesn't.
And there will be some discount to that. And then maybe, maybe just oftentimes kill the process because people are, you know, not all that confident in the plan that's been laid out or, or the business in, in its current state. So, you know, those are some of the things that we see. Yeah, there are a lot of, you know, existential things that happen to businesses in process that are out of our control, out of the operator's control, out of the sponsor's control.
You lose a customer, you, you know, you know, there's there's tariffs, there's headwinds on commodities, whatever, whatever it might be. You have to be able to defend against those. But realistically, if you put the pieces in place that John and Zorian have spoken about, you know, those are things that don't come up as frequently. Things are out of your control.
Things happen. I mean, it is what it is, but you know that those are the areas in which we find that people make the biggest missteps. And it's it's not always sponsors. It could be founders as well.
DT: All right. Good. Very good advice there. And, It's, it's a good segue to my next question, which if you do have to, replace part of the management team, all of the management team, when, when is the right time or how early do you have to do that? Zorian, could you speak to that issue?
ZR: Yeah, I agree with Doug.
I think you don't want to you don't want to rely on any Hail Marys and, try to fix things in the last stretch, in the 11th hour. I think that's way too risky. I think you really do have to prepare well in advance. Meaning, when you sign a deal with you, the hard work begins right there and then that, and, you know, for 5 to 7 years of your hold period, like that old adage goes, you know, if you, if you, fail to prepare, then prepare to fail. You cannot wait till the last minute if you do have to do something.
Look, I mean, you gotta do what you gotta do. If you, you know, you have to have a couple of, tools in the toolbox to make sure that, the business is running successful. And the focus should be not on how we optimize this for the sale. It should be really, wow do we optimize this to be a quality business, whether we sell this year or next year or whenever and whatever that optimization or decision or strategy is, the end goal should be on building a high-quality business or maintaining a high-quality business.
If that means that you need to improve, some of your, you know, management team members, hopefully, that's not the case. Again, ideally, you've had alignment and you're executing team is effective. You know, T-minus, you know, X years from the time that you want to sell the business. But if you do have to do it, then it is what it is.
But it's always, ideally with a goal of, of continuing to build an exceptional company, not just to cosmetically sort of make this, this look great. In the Sam or the MP or for the exit. Hopefully, that answers your question. David,
DB: Can I add one thing that can I add one thing? I had a, you know, one of the other things that I think is it is a detriment.
And, you know, fortunately, or unfortunately it happens is as founders sell businesses to sponsors and then sponsors, then sell the business to another sponsor or, to a strategic, you know, that management team might have been the original management team that the founder either employed or is the founder and continues to lead the business.
As people age out, I think the worst thing that you know, people do is not have that heir apparent or successor in place and then look in the exit to say, all right, well, we're going to go to a strategic only process here because, yeah, the C-suite wants to retire. They want to take all their chips off the table. They get 20% rolled into a business.
And now it's time to just go sell off into the sunset without any real leadership in place. You know, you roll a business into a large strategic that's great, but you still need operators within that segment of the business. You can't just roll it in without anybody leading, you know, steering the ship. So I think that's also something that needs to be thought about.
As, you know, people get up there and age and you have to be able to plan for that type of stuff as well.
ZR: I totally agree with Doug. I mean, the ideal state for any private equity firm is to have management that's been around for a long time. You don't want to replace people. You actually want to ideally have a great team in place that continues to grow.
But if it's necessary and unavoidable, yeah, you want to prepare for that well in advance. Because you're again, you're focused on building a great company not just to optimize for an exit.
JB: Yeah, yeah. I think if you're making significant sea level changes, right before an exit, it's it's going to be an alarm. For someone that's taking a close look at a business.
I would argue that if you're transparent, during an exit, you're not trying to hide anything, right? Because every buyer is looking for an opportunity, right? And some of the things that you weren't able to optimize during your whole period are now an opportunity for someone else, right? So think of it that way. Like we're all looking for candid, transparent sellers, right?
And I think that that is, an intangible relative to building trust with a buyer.
ZR: Absolutely.
DT: So guys, I'm definitely getting the message, that in the final, year or so of ownership, it's it's not the time to make, significant changes to the C-suite or the management team. And that can often backfire.
But I wonder, John, and then maybe Zorian take us through some appropriate steps you can take to improve EBITDA in the final year or so that just that makes sense in order to maximize the value when it comes to exit time?
JB: Yeah. So we're we're always looking at strategic pricing, right? We have a few third-party groups that specialize in this.
I mean, to a certain extent it falls under the same category as business analytics. If you really understand, buying patterns, gross margin by service, and net margin by service or product, you can really position yourself, to, build upon EBITDA, right? There are, you know, some opportunistic, you know, strategies to, you know, we're, we're we've recently partnered with a GPO group that is really a good fit for the lower middle market.
So we're able to leverage group purchasing, across our portfolio. So that's one way or another way of, kind of building, you know, your bottom line. But, you know, we're always looking for inefficiencies. And I would say another thing that we really haven't hit on much is technology. So, you know, we're we're, technology is so, powerful now.
It's it's it's a value creator if you've built out, a well-thought-out and integrated technology stack. And we've, we've been doing a little bit of work around AI and now pushing that, you know, inside our firm, we've been, experimenting and work trialing with various aspects of AI to make us more efficient. And now we're just rolling that out to our portfolio as well.
So there's, we're not, you know, cost cutters. But in the last few years, you want to try to optimize, the, you know, the various levers that you have with a business, but again, our focus is growing top line. So the commercial side, you know, in, in the last kind of half of our whole period, if we've done good work, if the portfolio, has done good work in building that OpEx foundation, now we're, we're investing in, growing that top line and, and as, as, as Zorian said earlier, it's not just sales. It's profitable sales.
DT: And John, you did mention AI. And of course, no webinar would be complete without a discussion of AI today. As you look at your portfolio of manufacturing companies, and building products companies, you mentioned, where is AI able to have sort of the biggest, quickest impact, in your view, is it sales and marketing? Accounting? Of all the different areas of a business, where where do you go first with AI to have an impact?
JB: I think ultimately, David, we're going to go everywhere with AI. Now, we're not very sophisticated, I'll tell you that, but we're also not going to be left behind when it comes to AI. So, where we're seeing it at the moment, across our portfolio is aimed at H.R. In marketing. In, you know, kind of marketing research.
This is at the portfolio level. You could argue that, you know, business analytics is using an aspect of AI, right? And these are all, you know, initiatives that make a business more efficient and make people, more efficient. We're creating bandwidth for, human capital. So, but those are the areas, that we're working on right now, and inside of Argosy, we're using data, right?
And we're automating, investment memos, quarterly reports, and so on and so forth with a select data set. Okay. So that's where we are internally as well as, you know, the HR piece, the marketing piece that we all know that it's, you know, you've gone from, you know, writing a blog or a case study that might take one human being, you know, 4 hours.
And using AI, you get a draft in 15 seconds, and now the author is editing it rather than creating the entire document.
DT: Right. And I don't complain about the work. And I and ask what kind of changes you'd like to make it even better. It's got a great attitude.
JB: That's right.
DT: Zorian, same question for you. And of course, you're working with technology companies, software companies, and SaaS companies. What are some appropriate steps you can take to improve it than that in the last year?
ZR: In the last year? Yeah, I mean, it's not an ideal thing to do in the last year. Like I said earlier, it should all begin, you know, far sooner. But if you have to do that, I think there are a couple of things.
You know, John talked about pricing, for example. Ideally, you'd want to do pricing optimization much sooner, but let's say you're doing it in the last year. One thing I would add to that is that while I know a lot of, you know, private equity firms and companies, bring in, pricing consultants to optimize it, the failure happens, actually, when that project is over.
So, for example, a private equity firm that is pricing optimized for a portfolio company. What's not obvious is that the sales team has a tremendous amount of anxiety selling the same product for a far higher price. How do you overcome that? Right. So you have to have somebody from the private equity firms who knows really well how to work with the head of sales or chief global commercial officer, CRO, or chief revenue officer, to connect it correctly to the team.
There are many ways to do it. But that's a that's a failure point. The other one, I would say that that's not talked about enough is that, you know, in terms of, selling at a higher valuation, where your company has a competitive moat and a great positioning in the market and a unique value proposition, how do companies actually differentiate themselves if you haven't spent, sufficient amount of, kind of resources on that earlier?
One of the key areas that is incredibly impactful has not been done enough, I think, to my sort of to what I've seen in private equity. But it's 10 times easier to do than improving your product or solution or anything else is differentiating through more effective selling. I mean, sell the way your customers want to buy. A lot of times there's a tremendous amount of friction in the way the companies sell and also customer experience, right, creating a much better customer experience.
We all want that. I mean, think about any last time that you were on the call with customer service at any type of company, there are so many friction points, but eliminating those and really emphasizing a much higher quality customer experience, that's actually quite simple. You can do it in the last year of your holding period. And by the way, again, it's ten times easier than trying to differentiate through a tenant's better product or solution or anything else.
There are so many other things I can say right now, but we don't have enough time. I would say, you know, on the private equity side of things, I think, what private equity firms should consider is having internal expertise, right? That actually knows how to implement not just operational improvements, but commercial improvements as well as operational improvements, which means accelerating revenue growth profitably and capital efficiently.
So 2 in 1, commercial and operational. And when you have that, you don't have to worry about the 11th hour. But even if you're stuck there and you have to execute a Hail Mary, well, you at least have the expertise, or Tom Brady on your team to do so, if I may. By the way, I'm in Boston, so I can say that.
DT: You can indeed. All right. We've got about ten minutes left, so I want to make, a final call for questions. Just use the question feature at the top of your screen, the chat box, with a question mark in it. And we're going to finish with a lightning round, where I ask each of my speakers in turn to talk about, the final year of a holding period that just went extremely well.
And we want to hear, what happened and how you managed, to accomplish that. So next question, this one is for John. John, at what point in ownership is it is it appropriate to actually start contemplating an exit? And these days, the possibilities including IPOs, exit to another private equity firm, exit to a strategic and maybe even a continuation vehicle managed by the same private equity firm. So many choices. How did those choices inform your strategy with the port co?
JB: Yeah, I think we've hit on most of this already. David, like when, when, when do you decide that a business is ready for an exit? Well, I think, you know, you have to put yourself in the position of the buyer, right?
What is a buyer looking for? They're looking for great, you know, human capital. And human capital is not just, you know, CVs and, you know, individuals, but it's culture as well, right? Does this, you know, an impressive group of talented individuals, do they work together? Do they work collaboratively? Right? So again, that's my bias as an operating person.
Like, it all starts with people. But, again, I think for a business to be attractive, you want some, you want, a trajectory over the last 2 or 3 years to tell the story about the next 5 years, right? So that's kind of what we're looking for. And, you know, I, I think it's very rare that a business is going to grow and EBITDA doesn't grow right along with it.
DT: Okay, let's, let's move into, the final lightning round. So you each have 2 or 3 minutes to talk about an actual company, name names if you can, and tell us about, why the last period of ownership went really well. How the steps that you took to accomplish that and and the actual result, and who you sold the business to? And, of course, as an investment banker, maybe pick a client, to talk about.
And we'll we'll start with you, Doug.
DB: So I think this aligns with what Zorian was just talking about, maybe to a tee, but we recently sold a business to a sponsor back strategic. And over the past, I guess the last 18 months. So maybe a little bit longer than the final year of their, ownership. They started to take share from the number 1 player in the space, which garnered some major attention from the number 1 player in the space.
They continued to grow their margin profile, remained relatively strong, and grew towards the end and really started to disrupt the strategic that ended up, buying the business. And, you know, that I think is maybe the best possible outcome for a lot of businesses where you start to really, for lack of a better word, piss people off at a, at a larger business because you're, you're eating their lunch.
And what better way than to kind of go and buy that business, take some of those best practices, and implement them internally in your own business? Obviously strength in numbers and scale is very important. And in this case, it was a great outcome not only for our client, but I think it'll end up being a fantastic outcome for the buyer because they ended up rolling some money into the new deal because they were so enthralled by this management team and this ownership group.
So, you know, that I think is an outstanding, in and out, ideal outcome for a lot of parties. But it goes back to, you know, the people process sales driving growth. I mean, that that was the that was the crux of that transaction.
DT: And, Doug, what what general industry was, were they?
DB: This was food, food-centric.
DT: Food-centric. Okay. Yeah, that's, that's good stuff. Zorian, let's move to you. So company you're really proud of what you accomplished in the last year or so. Tell us. Tell us all about it. I think you're on mute.
ZR: I apologize, I was coughing, and just got a cold, so, so I first of all, completely agree with Doug and with John. And what Doug just said is exactly my consistent experience across, all the highly successful companies. I've been very privileged and lucky and fortunate to be part of it. It's about successfully creating value for the customer and growing your revenue through a highly effective, commercial side of the business. Sales, marketing, customer support, customer success, enablement. Having a great product that creates value and return on investment for the customers, and can be measured in many different ways.
And you enable all of that, you know, and I loved with Doug just said, you know, people, pipeline process, performance and execution and effective planning and strategy, sort of I call these the five P's. And, you know, I would say that, you know, one of the experience, is, I was an executive at a company called AppAssure.
We sold it to Dell. This is a while back. Great business. But Michael Dell specifically said that the key reason he bought us was highly effective go-to-market, sales and marketing, and customer experience. And he wanted to implement our best practices and our approach, our process that will optimize and engineer sales management and go-to-market management process into Dell, into Dell Software.
And one thing I'll say here is when we talk about process, it's truly process engineering. So sales management, just to dispel sort of something that I think is considerably misleading out there. Sales management is not art, it's science. It's something you can do with math and scientific approach and put into an Excel spreadsheet. Again, whether it's a technology company or industrial or supply chain or service, all of that is Excel spreadsheets and math and the strategy of decision making behind it.
So if you have a business that's highly scientific, where you approach managing your go-to-market, sales, and revenue growth and commercial size side in a mathematical, scientific, and engineer manner, you're going to have a great quality business and you'll have a very successful exit.
DT: Okay, Zorian, thank you for taking us through that example. And, John, we'll give you the last word. So tell us about a great, final year of ownership for you.
JB: Oh, God, I got a good one. So we we held a, global sourcing business, for roughly, I don't know, the first 4 or 5 years the business stumbled lots of, turnover with, you know, the executive leadership team.
We helped stabilize that business and then started building it. We had a really strong CEO. We had, now a mature executive leadership team and all that kind of optics, foundation-building technology, you know, a team that was aligned. They were, growing profitably, but they were positioned now to take on, small bolt-on acquisitions.
So in the last year, this is 12 months, we took on two small, add-on acquisitions complementary to the business. Successfully, that's the key, integrated them and then exited the business. So in a year, we doubled EBITDA and we quadrupled our valuation. So that that that happened 2 years ago. And since that point in time, Argosy is now maybe leaned into the strategy around building strong platforms and now having the confidence to take on smaller acquisitions.
There's a little bit of financial engineering or arbitrage that typically goes with that. If you build larger enterprises they are, again, mostly integrated by the time you exit.
DT: John, that also sounds a little risky, too. Can you speak to that? I mean, what if, one of those bold-ons had gone poorly and then, just seems like all all bets are off?
How do you how do you mitigate the risks, of those acquisitions?
JB: Yeah, I well, I think it starts with when you're when you're thinking about add-on integrations if you have a strong team and that platform is also like rock solid, obviously it's going to it's going to, give you kind of the springboard to look at add-on acquisitions.
And then it comes down to due diligence, right? And with add-ons, you're doing your diligence in cooperation. And with the executive leadership team, it's it's a it's it's different than, you know, what we're often faced with, with which is you have a PE group that's looking and, and conducting the diligence, with our add-ons. We do it in partnership with the executive leadership team.
So I'm not sure if I have any magic, dust when it comes to risk mitigation, but, you know, run your standard playbook, right? And, don't get, over overly zealous with, Oh, my God, we can grow revenue with this add-on that it has to make sense. And I would say again, it goes back to human capital.
If you have a culture clash or you have exec, you know, at the C-level that are not connected, that that's a red flag to that, that you should think about, long and hard.
DT: Yeah. Okay. Well, we are out of time, I'm afraid. And I'd like to thank all the participants for coming. I'd like to thank our sponsor, Sourcescrub, for underwriting the webinar and making it possible.
Especially like to thank our speakers for doing a great job on the program. John Broderick of Argosy Private Equity and all the slides, which were wonderful. Doug Brookman of Mesirow Investment Banking, Zorian Rotenberg of Charlesbank Capital Partners, everyone enjoy the rest of your day.
JB, DB, and ZR: Thank you. David.
