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What Private Equity Firms Can Teach Business Owners About Creating Value

What Private Equity Firms Can Teach Business Owners About Creating Value

Six Lessons On How to Create Value From the World of Private Equity

Written by Craig M. Kaiser, Founding Partner

What Private Equity CAn Teach Businesses About Creating Value

Six Lessons On How to Create Value From the World of Private Equity

This article is not about being in a position for business growth but about having the courage and spirit to make a significant difference in the direction of a company.

The business leaders and private equity firms we have learned from at Phillips|Kaiser have asked us many questions about enhancing their business (and legal) strategies such as:

  • What values should guide our actions?

  • How do we create an environment that promotes innovation and risk?

  • How do we attract top talent?

  • How do we build a cohesive and spirited team?

  • How do we articulate a vision of the future when things are so unpredictable?

  • How do we get everyone on the same page?

In our legal practice, we offer guidance to private equity firms and business owners in answering these questions. However, in this article, I will share my observations on the distinct practices of private equity leaders when they are doing their very best. The processes seem simple and vary little from industry to industry or profession to profession. These are universal processes or ideas that if learned and applied by any business owner will bring immense personal and professional value.

Phillips | Kaiser

"In the process of seeking challenge, whatever the challenge, all private equity firms from my experience seek change from the status quo."


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5 Key Observations of Private Equity Leaders That Could Help Any Business

The challenge: completely reinvent the business.

At the time of a recent company acquisition, a manufacturing philosophy ruled the acquired business. It was about doing it cheaply, getting it out the door as quickly as possible. Their whole drive, their whole motivation was in quantity and volume.

The problem was that business as usual was drowning the company. The new team realized there needed to be a flow of fresh ideas and creativity. Old management systems had stifled and dampened new ideas in favor of speed. Something had to be done to revive this once great company.

The new team had to make a dramatic shift from manufacturing to a focus on creativity. It was a huge struggle. First, the new team had to get to the place where they could admit that all they really cared about was bringing the right kind of creativity and ideas into the organization. Once they were able to articulate it, things began to flow.

The old departmental structure gave way to highly decentralized production teams. Each team would be responsible for hiring their own talent and working on specific ideas. What evolved was a much thinner yet stronger support system.

The job of leadership shifted from control to providing support and backing for people to do what they were brought on to do.

Private equity firms specialize in seizing the moment. They do their due diligence in research, planning, and forecasting. They also are well aware of the players, competitors, products, technology, suppliers, business systems, processes, and other movers that drive the industries they seek to acquire.

This same single-minded adherence to a mindset, focus, and plan will help any business owner lead effective execution and change.

Private equity firms, from my observation, have the ability to get the most out of people. 

In order to get the best from people, you need to see them on more than a surface level. It's imperative that you get to know what makes them tick. When you do that you're a little bit more human, and you develop a system that is more trustworthy. 

Learning about your employees, their interests and passions make a huge difference in getting them connected to what you're trying to accomplish. It allows leadership the opportunity to discern how to motivate their people in order to do something extraordinary. 

To teach people how to work in this type of system requires lots of team building, lots of off-sites, and other forms of training. It requires significant time, energy, and resources to develop trust and grow leadership within a company. 

When getting extraordinary things done in organizations, business owners and leaders must engage in five practices according to James Kouzes and Barry Posner in their classic book, The Leadership Challenge

Those five practices are:

  1. Model the Way
  2. Inspire A Shared Vision.
  3. Challenge The Process.
  4. Enable Others to Act.
  5. Encourage the Heart.

Leadership is not all about personality; it is about practice --- putting things into action. When a business gets their bearings they can effectively guide others on the team toward peak achievements. 

Whatever the acquisition, and without exception, private equity firms venture out. None sit idly by waiting for things to change. "Luck" or "being in the right place at the right time" do play a role in opportunities we come by in life, but private equity firms seek and accept challenges many will not. 

In the process of seeking a challenge, whatever the challenge, all private equity firms from my experience seek change from the status quo. 

The delight is in challenging the process and stepping out into the unknown. It is also searching for opportunities to innovate, grow, and continually improve. 

Private equity firms have learned that innovation comes more from listening than from telling. Service and product innovations tend to come from clients, vendors, customers, and the people on the front lines. Process innovations always come from the actual people doing the work. 

One of the primary contributions a private equity firm can make in a company is providing recognition for good ideas, the support to implement good ideas, and the willingness to challenge the system to get new products, processes, services, and systems adopted by the company. 

Business owners will do well to learn that innovation and change all involve experimentation, risk, and yes, failure.

They proceed anyway.

Private equity firms know the key that unlocks the door to opportunity is learning. 

Warren Bennis says, "Leaders learn by leading, and they learn best by leading in the face of obstacles. As weather shapes mountains, problems shape leaders. Difficult bosses, lack of vision and virtue in the executive suite, circumstances beyond their control, and their own mistakes have been the leaders' basic curriculum."

In other words, the best business leaders are learners. They learn from their failures as well as their successes. 

Vince Poscente in his book The Age of Speed says, "Speed is the defining characteristic of our time." Speed trumps privacy, expense, convenience, and even fear. In this digital age of speed people often ask: "How can I have a vision of what's going to happen five or ten years from now, when I don't even know what's going to happen tomorrow?"

Venture capitalist Geoff Yang, of Redpoint Ventures, has taken on many risks with technology companies that are all expected to move at a rapid pace. What types of innovators is he willing to back? He says, "Men and women with great vision."

Adding, "They are able to recognize patterns when others see chaos in the marketplace. That's how they spot unexploited niche opportunities. And they are passionate about their ideas, which are revolutionary ways to change the way people live their lives or the way businesses operate. When they come to me they come with conviction."

Imagine you are driving from Houston to Austin along US 290 on a bright, sunny Texas day. You're cruising along at the speed limit, iTunes blaring, top down, wind in your hair, and not a care in the world. Suddenly, without warning, you come around a bend in the road, and the sun has created a massive blind spot. The sun visor on your car doesn't help. What do you do?

Some popular answers are:

I slow down.

I tense up.

I turn iTunes off so I can concentrate better.

I lean forward.

Then you go around the next curve in the road, the sun lifts, and it's clear sailing again. What do you do next? Speed up, relax, turn the iTunes back on, and enjoy the scenery.

This analogy illustrates the importance of clarity of vision, especially when you're going fast. How fast can you drive with the sun blaring in your vision without risking lives? How comfortable are you riding in the car when someone else is driving with the sun in their eyes? Are you able to go faster when the sun is at your back?

It's obvious, isn't it?

We're able to go fast when our vision is clear. We can better anticipate the bumps in the road when we can see ahead. There are always going to be times when the sun blinds our vision and makes it difficult to maneuver.

The challenge for business owners and leaders is maintaining a vision, in spite of all the distractions.

Keys To Business Success

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