Whether you’re considering a sale to a private equity (PE) firm or have just completed one, you may have questions about what lies ahead. Here, we outline what you can expect from new PE ownership and how finance and accounting can play a strategic role in the partnership.

Achieving a successful integration and fostering a strong, ongoing partnership with PE firms requires a clear understanding of their emphasis on top-line growth and operational efficiency to boost profitability. It’s crucial to align your team with these objectives. From a finance perspective, this involves setting clear goals for core finance processes, establishing stringent reporting requirements, and optimizing enabling technologies. By focusing on these areas, you’ll meet expectations and create opportunities for greater success and collaboration.

Consideration #1: Improving Core Finance Processes

PE firms typically start by evaluating the core financial processes within a company to identify capability gaps and risks. This assessment often covers areas such as Order-to-Cash (O2C), Procure-to-Pay (P2P), and Record-to-Report (R2R). To gain a comprehensive understanding of these processes, the PE firm may conduct interviews with key personnel, hire outside consultants for a risk assessment, or integrate members of their own team into the process.

This phase presents an opportunity for improvements in your finance processes, setting the business up for future success. Company management and staff should be prepared to discuss the current processes in detail, sharing insights on what works well and where improvements could be made. Key topics that the PE firm will likely focus on include:

Order-to-Cash (O2C)

This process encompasses the entire journey from sales order initiation through to the receipt of payment. Key elements include:

• Sales Order Management: Efficient processing of customer orders, including order entry, validation, and tracking
• Fulfillment Processes: Ensuring timely and accurate delivery of goods or services, managing inventory levels, and handling logistics
• Revenue Recognition: Adhering to accounting standards and regulations for recognizing revenue accurately and in a timely manner
• Accounts Receivable Management: Monitoring and managing outstanding invoices, implementing effective collection strategies, and addressing any disputes or delays

Challenges often involve streamlining order processing, managing cash flow, and ensuring compliance with revenue recognition standards. Best practices include leveraging automation tools for order processing and collection, and maintaining clear communication channels with customers.

Procure-to-Pay (P2P)

This process manages the lifecycle of procurement and payment. It includes:

• Procurement Processes: Identifying needs, sourcing suppliers, and acquiring goods or services efficiently and cost-effectively
• Vendor Selection: Evaluating and choosing suppliers based on criteria such as quality, cost, and reliability
• Contract Management: Negotiating and managing contracts to ensure favorable terms and compliance with agreements
• Accounts Payable: Processing invoices, managing payment schedules, and ensuring accuracy in payment records
• Payment Practices and Controls: Implementing controls to prevent fraud and errors, and optimizing payment methods for efficiency

Challenges in P2P include managing supplier relationships, ensuring timely payments, and controlling procurement costs. Best practices involve establishing clear procurement policies, using automated solutions for invoice processing, and regularly reviewing supplier performance.

Record-to-Report (R2R)

This process involves recording and reporting financial data. Key components include:

• Data Management: Collecting, validating, and maintaining accurate financial data from various sources
• Month-End Close: Performing month-end closing activities, including reconciliations, adjustments, and preparing for audits
• Financial Statement Preparation: Compiling and presenting financial statements in accordance with accounting standards and regulatory requirements
• Key Performance Indicators (KPIs): Measuring and analyzing financial and operational performance to inform strategic decisions

Challenges often involve ensuring data accuracy, meeting reporting deadlines, and interpreting financial metrics effectively. Best practices include implementing scalable financial systems, maintaining accurate internal controls, and conducting regular reviews of financial reports and KPIs to drive business insights.

Identified gaps or areas for improvement will be closely evaluated by the PE firm, which may allocate additional resources to address these issues. This is an excellent opportunity for management and staff to bring any existing inefficiencies or risks to light, ensuring your company is well-positioned to scale effectively.

Consideration #2: Bolstering the Management Reporting Package and Process

PE firms often have more robust reporting standards than those to which many small businesses are accustomed. This may include accelerated month-end close cycles, additional financial statements and metrics, specific disclosures, or even external audits by independent CPA firms.

To navigate these heightened reporting requirements effectively, small businesses must enhance their financial infrastructure and adopt more rigorous processes. This may include investing in advanced financial systems and technologies that can handle increased data complexity and reporting demands. Implementing internal controls and standardized procedures for financial reporting will help ensure accuracy and consistency. Training staff to understand and manage these new reporting standards is also crucial, as it helps prevent errors and improves the overall efficiency of the reporting process.

Additionally, establishing a proactive approach to financial governance can facilitate smoother interactions with PE firms. Regularly reviewing and updating financial policies to align with best practices can ensure compliance and readiness for audits. Engaging with external advisors or consultants who specialize in PE reporting can provide valuable insights and support in adapting to these standards. By focusing on these areas, small businesses can meet the rigorous expectations of PE firms and strengthen their overall financial management and strategic planning capabilities.

Understanding the PE firm’s monthly reporting timeline, required metrics, and areas where additional resources may be needed is crucial for a smooth integration. If your company already works with third-party accounting vendors or a CPA firm, involve them in conversations with the PE firm so they are clear on the new requirements and prepared to act when necessary.

Consideration #3: Optimizing the Existing Application Stack

PE firms understand that newly acquired companies often have untapped potential in their existing technology, which can affect operational efficiency and growth. To address this, PE firms will work closely with your team to evaluate your current technology stack, identify any bottlenecks, and pinpoint opportunities for enhancement. This collaborative review process aims to align technological improvements with your company’s strategic objectives, ensuring that any changes support overall business goals and drive success.

If the review suggests that a technology upgrade is necessary, you can expect an inclusive approach where you and your team will play a key role. This includes participating in vendor demonstrations, assessing new solutions, and selecting the technology that best fits your business needs. The PE firm will leverage their experience and preferred providers to guide the implementation process, ensuring that you receive comprehensive support and training. This approach maximizes the effectiveness of your technology investments and positions your company for long-term success and growth.

Moving Forward

Transitioning to PE ownership brings new challenges and opportunities. By aligning your company’s finance processes, reporting standards, and technology stack with the expectations of the PE firm, you can set the stage for a successful partnership and continued growth.