What MDs Can Learn from Private Equity Turnaround Strategies

What MDs Can Learn from Private Equity Turnaround Strategies

Introduction

I have had numerous conversations with both PE and non-PE management teams. On one side, I often hear, “We are PE-owned, so we need to act in the best interests of the PE firm.” On the other, there’s the sentiment, “We don’t act like a PE firm because we are privately owned, so we’re not ruthless.” While I recognise the feelings behind both perspectives, the reality is simple: the primary purpose of any business is to make profit and ensure long-term viability. When the chips are down, both ownership structures ultimately pursue the same goal. The main difference is that PE firms tend to be more decisive and upfront about the purpose of the business, leaving no room for indecision, a quality that can be crucial in turbulent times.

In challenging times, many managing directors of privately owned companies tend to misinterpret private equity tactics, assuming they’re aggressive and unsympathetic. However, a closer look shows that PE firms aren’t out to dismantle businesses; rather, they focus on the same essential priorities you value, maintaining operational stability, preserving cash flow, and ensuring long-term sustainability. This article examines how private equity firms respond during downturns and outlines practical lessons that MDs can adopt to bolster their own turnaround strategies.

The Primary Objective of Private Equity

At its core, private equity is about generating attractive, long-term returns by unlocking the latent potential within a business. This isn’t achieved through reckless or overly aggressive maneuvers. Instead, PE investors apply financial rigour, operational expertise, and strategic insight to improve processes, restructure operations, and ultimately enhance value. Their focus is on practical, measured interventions designed to stabilise the business before charting a path to growth.

Comparing Ownership Models: PE-Owned vs. Privately Owned Firms

Private equity–owned firms typically operate under a defined exit strategy and a short-to-medium-term focus, whereas privately owned companies often prioritise long-term stability and legacy concerns. Despite these differences, both ownership models share a steadfast commitment to business sustainability and success. Whether the aim is maximising investor returns or preserving a family legacy, neither party is willing to tolerate prolonged underperformance. Both prioritise operational stability, cash flow preservation, and the protection of their reputations, recognising that survival is essential before any strategic expansion can be contemplated.

Both models share several core attributes, including:

• Commitment to Business Continuity: Maintaining stable operations and ensuring the business remains viable during challenging periods.
• Cash Flow Preservation: Safeguarding cash flow as a critical resource for ongoing operations.
• Cost Optimisation: Streamlining expenses and enhancing operational efficiency.
• Reputation Management: Protecting the company’s credibility and market standing.
• Swift Crisis Response: Being prepared to act decisively when challenges arise.
• Financial Prudence: Upholding strong fiscal discipline and tight financial controls.
• Stable, Well-Motivated Workforce: Prioritising employee engagement and retention to preserve essential organisational knowledge.
• Continuous Improvement Culture: Encouraging ongoing learning and process refinement to stay agile.
• Strong Internal Communication: Ensuring clear communication channels that align the workforce with strategic objectives.

The Importance of Decisive Action

One of the key differentiators between private equity–owned firms and many privately owned companies is the speed of decision-making. Driven by portfolio managers who are under pressure to deliver returns within defined timeframes, PE firms tend to act rapidly when a downturn occurs. In contrast, MDs of privately owned companies might lack this external impetus, which can lead to hesitancy and slower responses. Over time, such indecision can allow problems to compound, potentially necessitating deeper, more disruptive interventions. In the worst case, delayed action might even jeopardise the firm’s long-term viability.

A critical enabler of this rapid decision-making is the deliberate organisational structure employed by PE firms. They set up robust board advisory structures and maintain ready access to a network of experts, from financial analysts to operational turnaround specialists. This framework minimises indecision by ensuring that each decision is well-informed and backed by specialised expertise. Importantly, these external resources operate within strict guidance, implementing only agreed-upon actions rather than having free rein. This ensures that every intervention is balanced and aligned with long-term strategic goals, taking into account the impact on employee morale and overall business stability.

During a crisis, while immediate action is critical, both ownership models recognise the importance of returning to these core principles. Any measures taken to stabilise the business must not only address the urgent need for survival but also lay the groundwork for a robust recovery that aligns with the longer-term shared goals. In other words, the crisis response should be designed with an eye on re-establishing the attributes listed above, ensuring that short-term fixes contribute to, rather than detract from, sustained long-term success.

A Myth-Busting Note

Before we proceed, let’s address a fashionable phrase you may have heard down the pub: “asset stripping.” Despite the liberal use of this term in some circles, in my experience, no PE firm is fixated on wrecking businesses. In fact, the notion of a ruthless, asset-stripping PE firm is probably a myth—coined and perpetuated by Hollywood and picked up by someone who wanted to sound like they knew what they were talking about.

I’m not saying there aren’t instances where large deals have been structured to sell off certain assets to enrich a deal or where businesses are acquired and restructured to achieve economic scale. Nor am I ignoring situations, such as accelerated sales processes triggered by potential insolvency, where asset divestitures occur. However, these cases are relatively uncommon and typically confined to distressed situations. For the most part, PE firms are structured to take decisive, measured actions that protect and enhance long-term value. It’s important to recognise that the primary goal, whether in a PE or privately owned setting, is to ensure the business remains profitable and sustainable.

How PE Firms Act During a Downturn

Contrary to popular belief, the actions of a private equity firm during a downturn are not about radical disruption for its own sake. Instead, their approach is focused on stabilising the business rapidly and then paving the way for recovery. Their interventions typically include:

• Operational Restructuring: Reviewing and streamlining operations to improve efficiency and reduce unnecessary costs.
• Management Adjustments: Implementing leadership changes or enhancing management capabilities when gaps are identified.
• Strategic Repositioning: Revisiting the business model to ensure alignment with current market conditions and opportunities.
• Financial Engineering: Adjusting the capital structure to secure the liquidity needed for turnaround initiatives.

These steps are not aggressive for aggression’s sake; they are practical measures designed to align the business with its long-term value creation goals while preserving critical aspects such as employee welfare and organisational culture.

Lessons for Privately Owned Companies

For MDs of privately owned companies, there are clear takeaways from the private equity playbook:

• Focus on Core Fundamentals: Prioritise cash flow, cost optimisation, and operational stability as the foundation of any turnaround strategy.
• Be Decisive, But Thoughtful: Rapid action is crucial in a downturn, but ensure that each decision reinforces long-term objectives and protects the welfare of your workforce.
• Empower Your Team: A stable, well-motivated workforce is invaluable, invest in employee engagement and maintain strong internal communication.
• Plan for Recovery: Address immediate challenges while keeping an eye on long-term recovery and growth.
• Learn from Best Practices: Adopt strategies like operational audits, financial discipline, and strategic repositioning that have proven effective in the private equity space.
• Align with Personal Goals: Even for so-called lifestyle businesses—where the primary aim might be to sustain a particular way of life—the underlying principles remain unchanged. Owners depend on a healthy, thriving business to support their personal lifestyle, underscoring the need for decisive, strategic action during downturns.
• Recognise Universal Financial Imperatives: Whether you’re running a privately owned business, a charity, or even a local village hall or church, generating a surplus is essential for long-term survival. Even not-for-profit organisations need to manage their finances effectively to maintain their services and support their missions.

Top Tip

If there’s one piece of advice I’d pass on, it’s to get back to first principles. Change the mindset of your entire business—not as a fleeting fad, but as a core, ongoing approach. Focus on understanding not just what things cost to buy, but how much revenue you need to generate to cover those costs. Reinforce that sales is the lifeblood of your business, ultimately, it’s your revenue that pays for everything. Make it a recurring theme in your meetings and communications.

You might be surprised that many team members don’t even know your margins; if someone has to grab a calculator to figure it out, that’s a win, it means you’re driving home a powerful point about financial discipline. For example, consider a humble block of post-it notes that costs around £5. With an operating margin of 10%, that £5 expense effectively requires you to generate £50 in revenue to be justified. Similarly, an additional administrator with a base salary of £25,000 would need roughly an extra £250,000 in revenue (assuming a 10% Operating margin & ignoring Tax and NI) to cover the cost.

Conclusion

While private equity firms may sometimes be perceived as overly aggressive, a closer examination reveals that their strategies during a downturn are fundamentally about preserving and enhancing long-term value, a goal that resonates with every managing director of a privately owned company. By focusing on core fundamentals, acting decisively through a well-structured decision-making framework, and ensuring that short-term crisis responses align with enduring business attributes, MDs can navigate challenging times more effectively. Ultimately, the practical, measured approaches of private equity offer valuable lessons for any business leader committed to long-term success.