How to Use Culture as a Springboard Toward a Smooth and Profitable Exit
Founders and CEOs can harness culture to maximize private equity investments and ensure profitable exits. Here’s how.
Originally published in Entrepreneur, August 2023.
Many founders looking to sell their businesses consider offers from private equity firms, which typically buy out most of an owner's stake while giving them a piece of the restructured organization, incentivizing them to fully participate in its transition and scale. These founders are in a unique position to help maximize the future value of their companies by supporting a critical aspect of their evolutions that most private equity firms don't sufficiently prioritize.
David Eaton, FMG Leading
Private equity firms are highly focused on the financial and operational aspects of businesses' potential, yet only a select few dedicate real, expert attention to the cultures of newly acquired portfolio companies. This can add risk to the strategies designed to grow organizations, as workplace cultures can serve to drive or impede companies' success, depending on their nuances, and will take form regardless of what actions leaders take. They either develop organically without intention or alignment to strategy or are purposely shaped for organizations' ultimate benefit.
This offers founders the opportunity to step into the role of culture advocate and champion, helping retain core aspects of their original cultures while sunsetting those that need to evolve. Founders who truly engage fully and openly in this process can help shape a culture 2.0 that honors the history and legacy of their organizations, maintaining the best of what they built, while serving strategic needs as the businesses grow.
A unique and singular role in cultural transitions
Founders across industries — from healthcare services to tech — are known for pouring their hearts and souls into their businesses, all but ensuring the cultures that develop are intertwined with their values, workstyles and preferences. As such, they can have an incredibly strong influence on the design of a refreshed culture that encourages the ideal combination of behaviors that will drive future value creation - from how decisions are made to openness toward new ways of working to how leaders share information.
Of course, founders can also struggle with the idea that the companies they built tirelessly will undergo cultural changes — reflecting the years and often decades they've invested in creating positive and productive workplaces. Feelings of defensiveness and distrust are incredibly common, especially for those in service-minded, mission-driven sectors, like healthcare, who rely on a professional vocabulary distant and apart from the world of private equity.
Founders should seek to identify these feelings and recognize what's driving them, ultimately getting to a place of understanding that the culture that got them "here" won't take them "there." Getting "there" will necessitate an intentionally designed culture 2.0. Their participation in the development of such cultures, and openness to new leadership adding their fingerprints to what they've created, will best ensure that organizations maintain their "secret sauce" while embarking on their next chapters.
Refreshing culture alongside private equity partners
A growing number of top-performing private equity firms are achieving success by supporting the development of strong, healthy workplaces, especially in mission-driven organizations. Increasingly, the savviest of these investors recognize the value of cultural evolution within their portfolio as a driver of growth, although most will admit it's not their particular area of expertise.
“Private equity firms are highly focused on the financial and operational aspects of businesses’ potential, yet only a select few dedicate real, expert attention to the cultures of newly acquired portfolio companies. ”
This leaves an opening for founders to advocate for the intentional development of refreshed cultures that accelerate organizations' journeys to growth and greater profitability while keeping their missions intact. Those who choose to be proactive in this area will overwhelmingly find willing and collaborative partners, as most private equity firms understand the importance of including founders in future-looking conversations. If anything, private equity firms are now so aware of the dangers of imposing their own top-down ethos that they often downplay the risk of inaction with regard to culture.
Of course, founders can only advance these efforts to a point, as their enduring success and bottom-line impacts require more than just an individual proponent. They'll need buy-in at the board level to greenlight the in-depth, expert work required to maximize results, including analyzing and mapping out the existing and desired future culture, designing and implementing work streams that facilitate a transition from one culture to another and "pulling" new cultural elements through every facet of the company until they become wholly engrained.
Pre-close due diligence can further harness value
The savviest founders are taking an even more proactive and novel approach toward maximizing their workplace cultures. Before putting their businesses up for sale, they're utilizing third-party experts to independently assess and quantify the value of the people-centric elements of their businesses, including both the cultural strengths they've cultivated and also their existing leadership. Not only do these investments significantly reduce the efforts required to intentionally transition cultures after a transaction, but they also increase the value of the companies and boost what buyers are willing to pay for them, shedding light on what has traditionally been an unknown.
These methods and tools are new but catching on, especially as more and more private equity firms, and founders alike, recognize how culture can serve as a barrier or a springboard toward a smooth and profitable exit.
Read this article as it originally appeared in Entrepreneur here.
David Eaton is a Principal at FMG Leading, a human capital strategy firm that helps clients build world-class organizations at the intersection of humanity and high performance. Dave's particular expertise is culture and its importance in driving organizational transformations.