By Scott Webb, Managing Director of Strategic Financial Consulting, and Mark Himelman, Vice President of Strategic Financial Consulting
When a family- or founder-owned company is acquired by private equity, one of the first big shifts comes quickly: creating a strategic and actionable budget. For many of these companies, budgeting has historically been some combination of a loose forecast, a number in the owner’s head, or our reliable old friend SALY (same as last year). Regardless, it rarely results from a thoughtful and measurable process designed to drive management’s behavior.
However, when private equity comes in, there’s suddenly an expectation for targets, regular tracking, and clear accountability, which can be a jarring transition. We’re here to share that it doesn’t have to be.
Setting a Strategic Budget
When we run a strategic budgeting process for our clients, our first step is always to bring the management team and the new owners to the same table. Our goal is to help both sides agree on top-line and bottom-line targets. This is more of a strategic discussion than a technical one.
Goals and incentives should be directly linked to these targets. By aligning them, cross-functional teams gain a clear understanding of their roles and contributions toward achieving the overall desired outcomes. Finalizing those figures is a more technical process and may require input from various team members.
Going Further – Commit to Stretching Revenue
Setting the budget doesn’t stop there. Tying compensation to both budgeted performance and stretch targets incentivizes sales & operations teams to deliver even more than they imagined possible. Showing management how stretch targets tie into incentive compensation reveals the direct link between the company’s success and their own reward.
Tracking the Budget
Our job isn’t done once the budget is set. Tracking actual vs. budget performance is typically more important than setting the budget. Without credible and timely financial results, managing performance throughout the year becomes challenging. Our team builds tracking tools, sets the cadence for reporting, and creates visibility into performance along the way. Working alongside the private equity sponsor, we monitor progress, measure against the plan, and pivot when needed.
What seems like a daunting exercise can easily become a shared roadmap to company success that includes buy-in from all members of the team. More importantly, if framed in the spirit of shared goals and a collective effort, it can be a rewarding and team-building process.
LCG’s Strategic Financial Consulting division provides tailored advisory services to private equity firms and family and founder-led businesses that address complex financial or operational challenges. For questions or to schedule a consultation, contact Scott Webb at [email protected].