Tapping the Middle-Market Channel: How PE Firms Became Profit Velocity’s Door of Entry

Having developed a manufacturing solution capable of helping middle-market manufacturers increase their cash contribution to revenue by 3 to 5 points, Michael Rothschild, CEO of Profit Velocity, thought that he may have created the manufacturing world’s next mouse trap. Nevertheless, Profit Velocity still faced a sizable learning curve when it came to finding a middle-market point of entry. Middle-Market Executive recently caught up with Rothschild to discuss how the firm ultimately cracked the middle market’s channel code.

MME: Profit Velocity has come to view private equity firms as an important point of entry for your middle-market clients. How did PE first emerge as this type of partner?

Rothschild: What we’ve seen is that private equity inside the post–financial crisis environment has changed from an industry that was essentially in the business of flipping houses. In other words, it used to be that a transaction for a PE firm would be where they hold on to a business, leverage it up, and then resell it to a buddy at another firm. Well, what PE firms discovered is that they actually had to go into the guts of many companies and — lo and behold! — discover ways that would operationally improve the rate of production. Because of that change, which is fairly recent, they began bringing in consultants from Bain, BCG, and McKinsey. These consultants have an operational focus. Along with this operations focus came a real need for tools that will allow these operating executives or partners to very rapidly assess and answer the question, What can we do here? And how can we find what’s in the cushions of the sofa of this $250 million company?

MME: So the idea of having more control over the profit-per-hour of a manufacturing operation would likely resonate with anyone asking these types of questions?

Rothschild: From our standpoint, if we can show them something like how to find 3 to 5 or more full percentage points of revenue, you could be adding $10 million a year, so this really got the attention of the owners, whereas if you were making the same pitch to a publicly held firm, where no one in particular owns the company, and the management is generally more concerned about job security than stock performance, we would get an entirely different reaction.

MME: Was there anything that you needed to modify to make your offerings more attractive — at least as far as PE firms were concerned?

Rothschild: Well, another aspect that is very recent is that we have figured out how to reduce the setup time. It used to take us 9 months, but having grinded away at the problem for a number of years, we have gotten extremely fast at this. Therefore, even before a PE firm acquires a company, while it is in the due diligence stage we can set up a system so quickly that if they have access to some ERP files in the data room we can give them a full, high-definition, living-simulator picture of what they are considering buying. They can try different scenarios and resolve how much they should be willing to pay vs. the PE firm that is bidding against them that doesn’t have the same insight. And it’s this extremely fast configuration capability that has turned out to be very good for us.

MME: Can you offer a point of comparison? What did these types of assessments require in the past?

Rothschild: I was just with a large enterprise firm in their Shanghai office, and they have 60 days to complete what a PE firm requires. In the past, to do these types of assessments they would usually spend three-quarters of their time building Excel models from scratch, assembling the data, cross-checking the data, validating it, rebuilding the models, etc. Then they would have only the last week or so to do the in-depth analysis and pull some all-nighters before they present to the PE firm. We’re now changing that entirely. We’re saying, Instead of having your consultants be data monkeys, this thing is ready to go. And within 3 days of you giving us the file with the raw data, you will have a full-blown working system. Then, instead of configuring, you can spend 5 out of the 6 weeks doing in-depth analysis and conferring face-to-face with the client and strengthening the relationship and bringing more value. It is this speed and power of the in-depth analysis that has become extremely valuable to the consulting firms who are now being hired by private equity firms.

MME: So where do you begin? To whom, exactly, are you selling?

Rothschild: It at first befuddled us, but what we have resolved for ourselves when it comes to this kind of three-headed customer is that we sell exclusively to the consulting firms, and they will sell to the PE firms. We ourselves do call on PE firms, but really only as a business development effort, and if we are not already working with the consulting firm they are working with, we suggest that maybe they’d like to introduce us.

It’s interesting. I sometimes compare it to the management of a building, where the company’s management is sort of the super of a building, and then there is the consultant and they are very much the contractor and the consultant may call on the building super, but the super doesn’t really care, because to get things done, you have to call on the landlord or the actual owner, and that’s the PE firm. Until you call on the PE firm or the owner, nothing is going to happen, because while the building’s super certainly would prefer that things be improved, he can’t write a check. However, if you call on the owners and say, “Hey, I can enhance the value of this property very quickly,” then things start moving.