As the Chief Business Development Officer for Entytle, I’ve spoken to a lot of Industrial companies. Like most healthy businesses, their leadership teams are focused on developing great products, taking care of their customers, managing costs, growing a talented and motivated workforce, and balancing short vs. long-term priorities. Many of the companies I interact with are owned by private equity firms. On the surface, one may not think that this ownership structure would significantly change operational priorities, but it does. I have particularly seen how the importance of a company’s aftermarket business becomes so critical to success. It’s been interesting to analyze the “why”, and I believe it boils down to 4 key reasons: Margins, Growth, Recurring Revenues, and Protecting the Installed Base.
The Importance of Aftermarket Business for PE-Owned Companies
Margins are Crucial
Margins are important to any business, but PE-owned companies need to not just make profits, but also grow them to justify their investments. Aftermarket operations tend to offer higher margins than original product sales but are often underdeveloped. By finding systematic ways to develop their aftermarket business, companies can grow overall margins independently of being able to win new customers.
Growth, the Second Key: Expanding the Top Line
Growth in margins is great, but expanding the top line is also a common KPI that is closely tracked. PE firms need to make an impact quickly and often have an investment horizon of just a few years. Once again, aftermarket to the rescue. By developing proactive ways to use analytics (yes, even AI) to identify opportunities in their installed base, companies can do a lot more than sell spare parts. Kits, upgrades, consumables, warranties, and services can almost always be better targeted using data. These add the right kind of numbers to their P&L and provide a source for additional investment in the business.
Recurring Revenues, the Third Key: Building a Solid Future
Since most PE-owned companies expect to be sold or spun off at some point in the future, having a healthy business is not just about today’s numbers, but needs to provide indicators of what they will be in the future. This is where recurring revenues, the kind that is very reliable from a strong aftermarket business, offer a wonderful base. Companies (and potential acquirers) greatly value the ability to have virtually guaranteed revenues at the beginning of every fiscal year. Further, the increased interactions and relationships with their installed base make customers less likely to churn and move to a competitor. A powerful combination.
Protecting the Installed Base: Safeguarding Future Success
A healthy and systematically managed aftermarket business enables a great story of continued profitability, further growth, predictability, and likely continued success. PE-owned companies understand this.
Also, read about Optimizing IT investments to drive Installed Base value.
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