The Coach's Corner

The Impact of Private Equity Groups

September 23rd, 2019 // Tom Doescher // 0 Comments

Tom Doescher - Doescher Advisors

As I reflect back on my 50 years in the workforce, I can’t think of anything that has affected and impacted businesses, especially middle market businesses, more than private equity groups (PEGs). Most of you know this, but for those who may not, in its simplest form the sponsors of a PEG raise investment monies from pension funds, insurance companies, wealthy individuals, and others. The money is pooled and then invested in the purchase of companies, many owned by their founders. If you own a business, this has created a great avenue for liquidating your investment in your business. Some PEGs will do partial purchases, and a few will even invest without gaining voting control (under 50 percent ownership). For private company owners, it provides another type of buyer in addition to individuals, companies, or going public, which has its pitfalls.

In this blog, I would like to point out one change in commerce that’s a direct result of PEGs: the concept of subscriptions (customer commitments to regular monthly payments, often automatically renewed annually). Obviously, subscriptions existed before PEGs, but if you look at different business sectors, there are many new versions of “subscriptions” that exist today. Some are obvious, others are not.

  1. Many IT product companies have transitioned from selling you their product for $1 million to effectively leasing their product for $20k per month forever.
  2. My partner’s dentist sold out to a dental roll-up group owned by a PEG, and they now offer an annual fee that includes basic cleaning, X-rays, etc., which is automatically charged to a patient’s credit card.
  3. There are a number of businesses that already had an annual, multiyear, or automatic renewal provision — so they already had a subscription. For example, I work with a security firm that provides home and business security alarms and cameras that are in this category.
  4. There are businesses that are attempting to transform what I might call a service into a product that can be sold as a subscription with a monthly fee.
  5. One of my personal favorites has to do with my lifelong passion for alpine skiing. Two companies have created a partnership through the outright purchase of multiple ski resorts or some other “arrangement.” They offer “season lift passes” that allow you to ski at many different major ski resorts throughout North America. The price point is such that with only two trips, it’s worth the investment. So, me being me, I’m trying to figure out what’s going on. They’ve taken a weather-dependent business, snow skiing, and solidified and made the revenue stream less variable and more predictable. Skiers need to purchase the season pass before Thanksgiving. (How’s that for cash management?) In addition, they’ve substantially increased the price of daily lift passes, which makes the season pass even more valuable, or they get premium prices from those who opt for daily passes. Brilliant!!!

Why are the PEGs so focused on subscriptions? The simple answer is that they’re reducing variability in revenues and increasing profit predictability for the purpose of reselling their investment as quickly as possible for as much as possible.

Maybe you should take this concept and apply it to your business. If you do, I’m confident your company will be more valuable.

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The Advisor’s Corner

Tom DoescherYou’ll find stories from the trenches, business lessons, and pertinent questions to help you find inspiration, professional growth, and leadership savvy.

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