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Four key areas for cost reduction and value creation in private equity
A focus on cost optimization can be used by private equity to build corporate resilience. Find out more.
1. Starting early in the quest for value prior to deal
The private equity deal team, in collaboration with the finance team, plays a crucial role at the outset of any deal. Their work begins with a market assessment, including strategic analysis and portfolio review, opportunity analysis, business modeling, tax structuring, financial due diligence and valuation. The next step includes establishing a target valuation and purchase price considerations, including transaction structuring. Given that private equity is a leveraged funding structure (as every CFO will most likely need to refinance the business at least once during the investment cycle), managing liquidity and optimizing the capital structure is also critical to value creation and plays to another key CFO strength.
From a due diligence standpoint, the finance team must assist in venturing above the gross margin line (income statement) to evaluate the sales and marketing operations, confirming alignment on key business drivers. The team needs to assess the viability of the revenue stream by understanding where and who the customers are and how the firm, business and products are perceived by their customers. This assessment then needs to be reflected in the firm’s projections and subsequent valuation.
Potential value creation opportunities at the portfolio company level are also explored at the due diligence stage. After the deal, the new portfolio company CFO will be mandated to uncover and exploit untapped opportunities across the cash and liquidity landscape as well as establishing the appropriate cost optimization strategy for building resilience and providing longer-term success.