Private equity firms rely heavily on a company’s financial health and future potential when making investment decisions. Tight forecasting and benchmarking are crucial tools that demonstrate a company’s grasp on its finances and its position within the market. Here’s what private equity firms typically look for in these areas:

Tight Forecasting:

• Accuracy and Transparency: Forecasts should be realistic and backed by solid data. Private equity firms don’t expect perfect predictions, but they want to see a clear understanding of the underlying assumptions and methodologies used.
• Multiple Scenarios: Strong forecasts consider various possibilities, including potential market fluctuations, economic changes, or competitor actions. This demonstrates the company’s ability to adapt to different situations.
• Historical Performance: A track record of accurate past forecasts boosts confidence in future projections. Private equity firms want to see if the company can learn from past errors and improve their forecasting abilities.
• Rolling Forecasts: Regularly updated forecasts (e.g., quarterly) demonstrate agility and responsiveness to changing market conditions.

Effective Benchmarking:

• Relevant Comparisons: The company should be compared to relevant industry peers and competitors, not just broad market averages. This provides a clearer picture of the company’s competitive positioning.
• Multiple Metrics: Benchmarking shouldn’t rely solely on financial metrics like revenue or profit. It should consider other relevant factors like customer satisfaction, employee turnover, or product innovation.
• Actionable Insights: The purpose of benchmarking goes beyond just comparison. It’s about identifying areas for improvement and developing strategies to outperform competitors.

Overall, private equity firms want to see a company that possesses:

• Financial Discipline: The ability to accurately forecast future performance and manage resources efficiently.
• Strategic Thinking: The capacity to understand market dynamics and develop plans to achieve a competitive advantage.
• Data-Driven Decision Making: The use of sound financial information and industry benchmarks to guide strategic choices.

By demonstrating tight forecasting and effective benchmarking, a company can convince a private equity firm that it’s a well-managed, forward-thinking organization with a strong potential for future growth – making it a more attractive investment opportunity.

The above also applies to the context of understanding variance – the difference between planned and actual numbers (both expenses and revenue). The sum of all variances gives a picture of the overall performance for a reporting period.  Private equity firms typically take a long-term view (3-5 years) on their investments, so variance within a single quarter for instance, even a significant one like a spike in sales in week 2, isn’t usually a major concern on its own. However, they will be interested in understanding the reasons behind the variance. Here’s how they might view it:

Positive Variance:

• Seasonality: If the sales spike is due to normal seasonal trends, it wouldn’t be a cause for alarm. The private equity firm would likely have factored this into their projections.
• One-time event: A large one-time sale or successful marketing campaign could cause a jump in sales. PE firms would want to understand the likelihood of this recurring and how it impacts future projections.

Negative Variance:

• Missed targets: A significant drop in sales, especially if it puts the company at risk of missing quarterly targets, would be a concern. PE firms would delve into the reasons behind the shortfall and assess the potential impact on the company’s long-term growth strategy.
• Underlying issues: The sales variance could be a symptom of deeper problems, such as weak marketing efforts, operational inefficiencies, or a changing market landscape. PE firms would investigate these possibilities to assess the overall health of the investment.

To recap, PE firms will consider variance within a quarter in the context of:

• Long-term trends: How does this variance fit into the company’s historical performance and future projections?
• Reason for variance: Is it a one-time event, seasonal trend, or a symptom of a larger issue?
• Impact on future performance: Will this variance affect the company’s ability to achieve its long-term goals?

Additional points to consider:

Stage of the investment: PE firms might be more tolerant of variance in earlier stages of investment where growth is the primary focus. In later stages, closer to an exit, they might expect more consistent performance.

Communication: It’s crucial for the portfolio company’s management to communicate clearly with the PE firm about any variances. Transparency builds trust and allows for a more collaborative approach to addressing the situation.

So while private equity doesn’t ignore variance within a quarter, their primary concern is understanding the reasons behind it and its potential impact on the company’s long-term success.

In-period pipeline generation trending, pacing, tracking mix, and subsequent conversion trending all play a crucial role in helping private equity understand the reasons behind variance within a quarter, especially for sales-driven companies. 

Here’s how each metric contributes:

• In-period pipeline generation trending: This metric shows how quickly the company is generating new sales opportunities throughout the quarter. A sudden spike in sales in week 2 could be due to a concentrated effort to generate leads earlier in the quarter. Conversely, a slow pipeline generation could explain a shortfall in sales later in the period.

• Pacing: Pacing compares the actual sales achieved to the projected sales for the quarter, broken down by week or month. This helps identify if the sales spike aligns with the planned ramp-up or deviates significantly.

• Mix Tracking: Mix refers to the types of sales being generated. Tracking the mix allows PE firms to see if the sales increase is due to the company selling more high-value products or simply a surge in lower-margin offerings. This helps assess the overall profitability of the sales bump.

• Subsequent Conversion Trending: This metric tracks how effectively the company is converting generated leads into actual sales. A surge in sales could be due to a temporary improvement in conversion rates, but this metric helps identify if it’s sustainable or a one-time event.

By analyzing all these metrics together, private equity firms can gain a more nuanced understanding of the variance within the quarter. Here are some examples:

• Scenario 1: A company experiences a significant sales spike in week 2. Pipeline generation data shows a concentrated effort to close deals earlier in the quarter, while conversion rates remain steady. Mix tracking reveals the sales increase is from high-value products. This suggests a successful sales push and wouldn’t be a major concern for PE.

• Scenario 2: Sales drop significantly in the final weeks of the quarter. Pipeline data shows a slowdown in lead generation throughout the period, while conversion rates remain flat. This suggests a broader issue with lead generation and requires further investigation by PE.

In summary, in-period pipeline generation trending, pacing, mix tracking, and subsequent conversion trending provide valuable insights into the “why” behind sales variance within a quarter. I’ve heard something twice recently from two smart business leaders, “any business that hopes to be successful must understand these principles and how critical they are”.

Mastering your performance trends, refining projections and pipeline accuracy, and meticulously managing deal slippage are pivotal steps in presenting your story to private equity with unparalleled clarity. By shifting focus to quarterly evaluations and embracing expert guidance, you empower yourself to make informed decisions. This not only enhances your performance but also enables private equity firms to navigate your narrative with precision, ensuring confident investment decisions grounded in a thorough understanding of your business’s health and potential.