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How can you balance standardization and flexibility in LBO performance measurement?

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Leveraged buyouts (LBOs) are a common strategy for private equity (PE) firms to acquire companies using a high level of debt. To ensure the success of an LBO, PE firms need to measure and report the performance of their portfolio companies regularly and accurately. However, there is no one-size-fits-all approach to LBO performance measurement, as different companies may have different business models, financial structures, and value drivers. How can you balance standardization and flexibility in LBO performance measurement? Here are some tips to help you design and implement a robust and adaptable LBO performance measurement system.

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Anne Ijera

Industrialist's Daughter & Life Enthusiast | Embracing the Vibrancy of Every Moment while Crafting a Legacy of…
Alejandro Olivella

Founder OLDA Brands | Business Developer | QSR Brands franchise | Real Estate | Retail
Franco Ieraci

Funding Visionaries Through My Exclusive Network of Investors Located in The Middle East & USA | Personal Placement |…

1 Define key metrics

Defining key metrics that reflect the value creation and risk profile of each portfolio company is the first step. These metrics should be in line with the investment thesis, value creation plan, and exit strategy of the PE firm, as well as industry standards and benchmarks and the expectations of stakeholders such as lenders, investors, and regulators. Commonly used metrics for LBO performance measurement include EBITDA (earnings before interest, taxes, depreciation, and amortization) to measure operating profitability; EBITDA margin to measure operating efficiency; Free cash flow (FCF) to measure cash available for debt repayment, dividends, and reinvestment; FCF yield to measure return on invested capital; Net debt to measure leverage; Net debt/EBITDA to measure debt service capacity; Internal rate of return (IRR) to measure annualized return on the PE firm's equity investment; and Multiple of invested capital (MOIC) to measure total return on the PE firm's equity investment.

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Alejandro Olivella

Founder OLDA Brands | Business Developer | QSR Brands franchise | Real Estate | Retail
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Definir métricas clave alineadas con la tesis de inversión, plan de creación de valor y estándares de la industria es esencial. Métricas como EBITDA, Margen EBITDA, FCF, Rendimiento FCF, Deuda neta/EBITDA, TIR y MOIC son fundamentales para evaluar el desempe?o y el perfil de riesgo, satisfaciendo las expectativas de prestamistas, inversores y reguladores.

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Franco Ieraci

Funding Visionaries Through My Exclusive Network of Investors Located in The Middle East & USA | Personal Placement | Investor | Dealmaker & Capital Expert | 3x Founder, 2x Exit | The Pitch King ??
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Defining key metrics is a solid foundation. However, it's also important to tailor these metrics to the specific context and life cycle stage of each portfolio company. Flexibility in how these metrics are applied—recognizing the unique challenges and opportunities each company faces—enables a more nuanced understanding of performance. Integrating both standardized benchmarks and customized indicators allows PE firms to capture a fuller picture of value creation, facilitating strategic decisions that are informed by both broad industry standards and specific operational realities.

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2 Establish a reporting framework

The second step is to establish a reporting framework that specifies the frequency, format, and content of the LBO performance reports. This should be based on the needs and preferences of the PE firm and the portfolio company, as well as industry and market requirements and best practices. Additionally, it should be flexible enough to accommodate changes in the business environment, strategic objectives, and data availability. When setting up a reporting framework, you should consider factors such as the reporting cycle (which can range from monthly to quarterly to annually), the reporting format (which can include tables, charts, dashboards, or narratives), and the reporting content (which can vary from high-level summaries to detailed breakdowns). All of these depend on the type and amount of information, the intended audience, confidentiality and sensitivity of information, and stakeholder feedback.

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Alejandro Olivella

Founder OLDA Brands | Business Developer | QSR Brands franchise | Real Estate | Retail
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Establecer un marco de informes adaptable a las necesidades del capital privado y la empresa de cartera es crucial. La flexibilidad, considerando frecuencia, formato y contenido, refleja la dinámica del entorno empresarial. La atención a factores como confidencialidad, sensibilidad de la información y retroalimentación de las partes interesadas garantiza un enfoque integral y ajustado a las expectativas del mercado.

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3 Implement a reporting system

The third step is to implement a reporting system that enables the collection, analysis, and dissemination of the LBO performance data. This system should be reliable, accurate, and timely; it should also be scalable, secure, and user-friendly. To reduce errors, inconsistencies, and inefficiencies, the reporting system should be integrated, standardized, and automated as much as possible. Elements of such a system include data sources which provide raw data for LBO performance measurement (e.g., financial statements, management accounts, budgets and forecasts, operational data, market data, external data), data tools which process and transform raw data into LBO performance metrics (e.g., spreadsheets, databases, software applications, models, formulas), and data outputs which display and distribute metrics in the form of reports (e.g., printouts, emails, online platforms, presentations, meetings).

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Alejandro Olivella

Founder OLDA Brands | Business Developer | QSR Brands franchise | Real Estate | Retail
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La implementación de un sistema de informes sólido es crucial. La confiabilidad, precisión y escalabilidad son imperativos, junto con la facilidad de uso y seguridad. La integración eficiente de fuentes de datos, herramientas de procesamiento y salidas garantiza una gestión efectiva de la información clave, evitando errores e ineficiencias.

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4 Review and update

The final step is to review and update the LBO performance measurement system periodically and as needed. The review and update process should involve the feedback and evaluation of the PE firm, the portfolio company, and the stakeholders, as well as the comparison and benchmarking of the industry and the market. The review and update process should also consider the changes and challenges in the business environment, the strategic objectives, and the data availability. The review and update process should aim to improve the relevance, accuracy, and usefulness of the LBO performance measurement system, as well as to identify and address any gaps, issues, or opportunities.

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Alejandro Olivella

Founder OLDA Brands | Business Developer | QSR Brands franchise | Real Estate | Retail
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Revisar y actualizar el sistema de medición del desempe?o de LBO es el último paso crítico. Este proceso debe incorporar la evaluación de la empresa de capital privado, la empresa de cartera y las partes interesadas, así como la comparación con la industria y el mercado. Adaptarse a cambios en el entorno empresarial, objetivos estratégicos y la disponibilidad de datos es esencial. El objetivo de esta revisión y actualización es mejorar la pertinencia, precisión y utilidad del sistema de medición, identificando y abordando cualquier brecha, problema u oportunidad que pueda surgir en el proceso de evaluación del rendimiento de LBO.

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5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Anne Ijera

Industrialist's Daughter & Life Enthusiast | Embracing the Vibrancy of Every Moment while Crafting a Legacy of Innovation & Empowerment
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(a) Incorporate feedback from operational teams within portfolio companies. They often have valuable insights into the day-to-day challenges and opportunities that may require adjustments to the measurement framework. Operational teams highlighted the importance of measuring customer satisfaction and retention in a service-oriented portfolio company, prompting us to include these metrics in our performance dashboard (b) Extend scenario analysis to include stress testing under extreme conditions. This adds an element of flexibility by assessing how a portfolio company would perform in adverse scenarios. In the financial services sector, we conducted stress tests to evaluate the impact of economic downturns.

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Alejandro Olivella

Founder OLDA Brands | Business Developer | QSR Brands franchise | Real Estate | Retail
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Implementé un sistema de informes eficiente en la cadena de comida rápida, optimizando métricas como el Margen EBITDA y el Rendimiento FCF. La revisión periódica permitió adaptar estrategias, logrando un aumento del 15% en la eficiencia operativa y la satisfacción del cliente. Establecí un sistema de informes centrado en métricas clave como el EBITDA y FCF. Como fundador de OLDA Brands, mi visión pionera impulsó la revolución en la gestión de efectivo. Somos los verdaderos pioneros al integrar IA para recepción y despacho, eliminando riesgos. Esta visión única me llevó a establecer un estándar inigualable, marcando la pauta en la industria y redefiniendo el manejo de efectivo en establecimientos.

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How can you balance standardization and flexibility in LBO performance measurement?

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1 Define key metrics

2 Establish a reporting framework

3 Implement a reporting system

4 Review and update

5 Here’s what else to consider

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