Exit Readiness in 2025: Standing Out in a Crowded Market

To stand out in what is likely to be a crowded exit market, PE firms and their  portfolio company management teams should focus on generating near-term, profitable organic growth.  There are several actions that a company can take to help drive near-term organic growth and support an overall exit story.

Expectations are building for 2025 to be a much better year than 2024 for private equity exits.  With inflation declining (or at least stabilizing), the U.S. election complete, and over $900B^[i] in private equity dry powder to invest, the stage is set for an improved deal-making environment.

But the picture is not rosy for all private equity firms and their portfolio companies.  The deal environment in 2024 was driven by top performing portfolio companies that were going to attract a lot of interest regardless of the macro environment.  The challenge for 2025 will be for portfolio companies that may have relatively weaker fundamentals to sell at acceptable prices, many of which have been held for longer than planned.  Exacerbating the challenge for many such companies are constraints on exit timelines and new capital to invest in the next multi-year phase of growth.

The Exit Backlog

In a sign of continued challenges to sell portfolio companies, 2024 exit volume was~30% below the recent historical average^[ii] (see chart below).

The lack of exit volumes have contributed to a buildup of portfolio company inventory.  PitchBook estimates there are 11.7K private equity backed companies in the U.S.  Of this total, about 7.8K have been held longer than 4 years, with 3.8K of these held for over 7 years in duration.  With the lack of exits, the average holding period for exited companies has increased to 6 years^[iii], the highest level in over a decade.

And while there is a case for optimism for 2025, investors should not plan on low interest rates to help.  In its December 2024 statement, the Federal Reserve indicated inflation is still somewhat elevated and sees potential for only two rate cuts in 2025. They further elaborated that inflation is not likely to reach the Fed’s 2% target until 2026.

While a major factor in the lackluster exit environment has been inflation and higher interest rates, other factors have been at play as well.  These include stalled growth in end markets, investment theses that have largely been executed, and a reluctance to invest in the next multi-year phase of growth.

Driving Near-Term Organic Growth

 Among the many factors that a prospective buyer considers when evaluating a PE-backed company is its ability to drive organic growth.  Telling a growth story for a company typically includes sizing the addressable market, promoting deep customer relationships, describing potential future add-ons, and sharing plans for new products and services.  All of these are important, but if a company lacks consistent and strong performance on organic growth, then the above considerations will be discounted by a buyer.  It does not matter how large the addressable market is if you do not have the track record to execute to reach it.  In the context of successfully exiting a portfolio company, organic growth is the key to standing out.

But many longer held PE-backed companies have had trouble reaching the necessary organic growth performance.  And if they are boxed in by an exit timeline or limited capital to invest for growth, their options will likely be tactical in nature and ones that can be executed quickly with low risk.

The good news is that there are options that a company can pursue that fit within these constraints, help drive organic growth and support an overall exit story.  These include:

• Cross-selling and account growth:  Growing existing accounts is typically the easiest way to drive organic growth.  With established relationships, a seller can get an audience to credibly pitch a broader mix of products or services.  But there are often internal organizational barriers that need to be removed to maximize this strategy.  Example barriers include mis-aligned sales incentives; a lack of sales rep training on offerings; unclear sales process, roles and responsibilities in team-based selling situations; a lack of understanding of which offerings to cross- or up-sell; accessing different call points; difficulty in measuring cross-selling performance; and others.

Portfolio companies that have grown with add-on acquisitions that have resulted in broader product or service portfolios are good candidates to review for potential improvement.  Addressing these organizational obstacles can be done quickly and have an immediate impact.  Moreover, prospective buyers will closely examine the company’s cross-selling performance, so getting this right is a must.

 

• New customer prospecting:  Feeding the top of the sales funnel is always critical and a company’s ability to consistently acquire new customers will get close scrutiny in an exit process.  But many middle market companies have under-invested in marketing, resulting in salespeople having to do much of this work, which takes away from selling time.  Adding or expanding digital marketing and analytics support can free up salespeople to spend more time on generating new prospects and leads to pursue.  This support is especially helpful for businesses such as residential, construction, and healthcare services, where there is a need for micro-targeting in local markets.

• Win teams:  Every sales opportunity is important to convert, but the strategic and/or larger ones are especially critical and require added focus and coordination.  To tilt the odds of winning in your favor, form a cross-functional “win team” to put forward a proposal that demonstrates a compelling value proposition and commitment to delivering that value.  Sales, marketing, customer support, finance, operations and executive leadership should be represented as they all have a role in helping to win and delivering a great customer experience.  These teams can be formed and disbanded easily.

• Redeploying some sales resources:  Customer bases often include underserved accounts that have potential for growth.  Revisiting past decisions on account coverage, along with fresh research and discussing with customer stakeholders their plans and needs, often results in new opportunities for account growth.  To help capture such opportunities, some sales reps may need to be reassigned to cover them, or accounts can be added to existing coverages.

• Sales incentives:  There are several sales incentive tactics companies can implement quickly and at low cost to increase sales team motivation and drive near-term results. Gamification strategies encourage healthy competition and keep sales reps motivated. Sales leaderboards, team-based competitions, point-based rewards and time-based challenges are gamification examples that are relatively easy to implement.  Recognition programs, non-monetary rewards (e.g., extra time off, professional development opportunities) and experience-based rewards (e.g., tickets to events, dinners with executives, paid vacations) are also effective.

• Select pricing changes:  With the inflationary environment of the last few years, companies have been able to push through blanket price increases.  In the current environment with inflation still elevated, select price increases are more likely to be accepted.  Portfolio companies should review pricing approaches, especially transaction level pricing to ensure net pricing and contribution margins for customers, products and services are acceptable.  Tightening up pricing governance and approval authorities can often also help combat margin leakage.

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Organic growth performance is a key differentiator in any exit process but especially in a crowded deal environment.  Even with time and capital constraints, portfolio companies can improve their growth performance and stand out.

Michael Connerty is the Founder and Managing Partner of Groove Strategy Group LLC. He has over 28 years of experience helping companies grow profitably and can be reached at mconnerty@groovesg.com. 

Maria Gacek is a seasoned consultant with over 15 years of experience at top management consulting firms.  Her experience spans Growth Strategy, Market Analytics, Commercial Excellence and Commercial Due Diligence.  She can be reached at mgacek@groovesg.com. 

Jennifer Kozak is a Managing Director with Groove Strategy Group LLC.  She has 20 years of experience helping B2B companies accelerate profitable growth via Commercial Excellence, Value Capture Planning and Go-to-Market Strategy.  She can be reached at jkozak@groovesg.com. 

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