The following is adapted from The Private Equity Playbook.
When it comes to consultants, my personal opinion has changed dramatically over the last two decades. As a young guy, I used to joke with a bit of arrogance:
“If you can’t do, teach or consult.”
Since then, I’ve totally changed my tune. As a leader, as a CEO, I recognize that there is a time and a place to bring in consultants. Once I partnered with private equity firms, I discovered private equity likes to use consulting groups for several reasons:
- Earnings before interest, tax, depreciation and amortization (EBITDA): Consultants represent an add back. Even though you’re expensing cash, it’s not a permanent expense. Consultants can be expensive, but it’s a one-time cost and thus can be added back to earnings.
- Best practices: Consulting groups spend a significant amount of time working with companies, and they pick up best practices. They come into an organization and impart wisdom that the company itself does not have.
- Different views: Within a company, everyone has a job, so it’s not always easy to take a step back and conduct a successful self-assessment or tackle a project when the goal day to day is to focus on serving your current customers. The old adage “can’t see the forest through the trees” comes to mind. Consultants come in with a fresh set of eyes and will quickly spot what you can’t.
We bring in consulting groups to my companies frequently. They help us look for process bottlenecks, help redesign existing processes, and help us build a better mousetrap. In this way, we can serve existing customers and future customers more efficiently and cost effectively, increasing our EBITDA by improving margin.
When you sell your business to a private equity firm, your view on consultants might have to shift. This article will help. We’ll look at how consultant help your business, when to hire them, and how the private equity firm can help shift your mindset.
Consultants Help Surge
I spend a great deal of capital to work with consultants. They bring to the table not only tremendous knowledge and best practice sharing, but they also provide our company with surge capacity. They add enough boots on the ground to help us address a large-scale problem and manage that process with speed.
As an example, last year we worked on a large redesign of the sales organization and account management in my current company. We hired a sophisticated consulting group that services many Fortune 500 companies, and they focus only on sales redesign.
My team doesn’t have the expertise, nor do we have the capacity to actually conduct a five-month project and stop doing our day jobs to manage it.
The consultants split the project into various work streams and then tap into cross-functional sales and operations teams from the company. These employees work on steering committees for each work stream to help educate the consultants on our industry and specific issues, but my team only spends an hour here or there in meetings.
The actual number crunching, analysis, and redesign is happening behind the scenes. The consultants do the work and have meetings with the teams to keep them updated, solicit feedback, and keep the project on track. Employee disruption is minimal.
Sure, I could probably solve this problem by hiring a couple of employees and taking a few years to do this project, but the consultants can provide surge capacity and completely redesign the sales process from top to bottom in a couple of months.
At the end, I have a new comp plan, new job descriptions for the different players, and a manager’s playbook that discusses metrics and the cadence to put in place, tailored to the specific needs of our company and industry.
When to Hire a Consultant
Consultants can come in at various points in the process. In fact, the private equity firm will utilize consulting groups before even buying your company.
The firm may have familiarity with your type of industry or business, but they don’t necessarily have specific knowledge. During this time of diligence, as they look at the company’s processes, they will bring in different consulting groups for assessment.
One may assess the industry at large. How big is it and who are the big players?
Then they may hire a group to assess the strength of departments. For IT, how is the security? What platforms do they use? Is there a risk? Can the company scale?
Once the purchase is made, any future consultants will be hired with board approval.
Shift Your Mindset
As a business owner, you’re used to being the expert. You built your business and know every aspect of it. In your mind, there’s not a single consultant out there who can come in and tell you how to run your business better. That was my attitude when I came into the world of private equity and running companies, but I very quickly rethought that position.
The consultants aren’t necessarily experts in your business, but they are experts in certain areas of running a business. I now fully embrace consultants.
The private equity group you work with will have referrals on hand. You can tap into their knowledge, and they will have a ready list of consulting groups.
This is a part of embracing that partnership with the private equity firm. You’ve aligned with a private equity firm that wants to help you grow your business in the best possible fashion, so they can sell it again for a higher price and make you even more money.
The key is to assess exactly where you are. Do you know everything? Do you have the expertise? And more importantly, do you have the bandwidth?
If you do, fine. Consultants probably aren’t necessary.
But if there are problematic areas of the business or ones that could use improvement and you don’t have the time or expertise to attack them, consulting groups can help. There is a saying – “If it isn’t broke, don’t fix it”. My variation to that theme is – “just because it isn’t broke, doesn’t mean its efficient!”
For more information on working with consultants, you can find The Private Equity Playbook on Amazon.