Organizations across the country continue to grapple with ongoing market volatility, unprecedented economic shifts, technological advancements, and evolving business and societal needs. Leadership teams are challenged to develop and execute innovative strategies to drive their businesses towards sustainable, successful futures. Adapting to change has always been critical for success, but we feel, in this current environment, change needs to be embraced proactively.
Welcome to the inaugural Citrin Cooperman Private Company Performance Report. Citrin Cooperman has been serving and advising middle market, private companies for over 40 years, and created this survey to discuss what is top of mind for business leaders across the country. Privately held companies have always been the driving force behind our economy. In fact, of the 33 million businesses
in the U.S., more than 99% are privately held.1 This survey covers a multitude of topics and aggregated responses from private companies across a wide array of industries with revenue size of under $10 million to over $1 billion. We have also included insights and commentary from some of our industry and service leaders.
https://www.chicagobooth.edu/review/is-us-economy-going-dark
99% 33M
Privately held companies have always been the driving force behind our economy. In fact, of the thirty-three million businesses in the U.S., more than 99% are privately held.
Our survey polled 1,000 leaders and revealed several common threads:
• Positive financial performance;
• Concerns over inflation and interest rates;
• Data is replacing cash as being king;
• Too many companies have inadequate cybersecurity; and
• The human workforce is the Achilles heel of technology advancements.
The survey revealed several significantly different responses, depending on company size, industry, and ownership structure. For these anomalies, our industry and advisory leaders helped explain the reasons for these differences and what leaders should do next.
Inflation and a higher cost of capital reduced profits in 2023, but the vast majority of our respondents increased revenues and free cash flow. As expected, technological changes have been and continue to be a significant disruptor into the future, but although tools like bots are replacing human tasks, the workforce is still critical to future success.
One thing that has become very evident to us as advisors, and confirmed by this survey, is the inter-dependency of an organization’s workforce and technology solutions to evolve together rapidly, in order for an organization to be successful in digital transformation. Respondents made it clear that investments in technology, absent a properly skilled and trained workforce, will at best result in nominal improvements, or at worst fail, waste recourses and distract the workforce.
This has prompted respondents to fill a significant portion of their skills gap through outsourcing.
We hope this survey and related insights help inform the best way forward to create, protect, and build value in your business. Do not hesitate to reach out to our leaders with any questions, and please visit our website for other Citrin Cooperman surveys, ebooks, interviews, and articles being published throughout 2024.
We polled 1,000 senior leaders of privately held companies spanning industry sectors across the nation to measure the performance of their businesses in the moment and take stock of future opportunities, priorities, concerns, and challenges. Here is what your peers reported and their considerations about what may come next. Complete information on the survey methodology and respondent demographics can be found at the end of our report.
You’re in good company— respondent profile, high level:
75% have a physical presence in multiple states, 39% in another country. 80% have more than 500 employees, 96% have more than 100 employees.
66% are C-Suite (CEO, CFO, COO, other) or founders, presidents, and managing partners. 62% 51% report revenue or assets under management (AUM) between $100 million and $1 billion. are privately held, 8% are family owned. 40% are private equity owned or venture capital-backed.
performance now… and the need for the next level of
In our findings, at the highest level, we see very strong private company financial and market performance. Yet the opportunities to leverage advanced technology for sustained performance, and future ready competitive advantage, remains challenging for many. A great number of these challenges are workforce or digital skills centric.
92% saw moderate to strong revenue /AUM growth. 89% saw moderate to strong EBITDA growth. 82% forecast revenue at least quarterly. 68% are optimistic about economic growth.
46% do not have ability to fully evaluate all aspects of intelligent automation investments. 31% last updated their ERP system more than five years ago.
80% say barriers exist to implementing or expanding use of AI.
Only 29% have fully implemented data analytics tools.
THE BIG PICTURE BY THE NUMBERS (CONTINUED):
60% are using artificial intelligence (AI) for multiple functions.
53% sell more than half of products online.
27% report online sales have doubled in past 12 months.
50% say the ability to gather and analyze customer data to better predict their behaviors is most important to stay competitive.
48% say the ability to gather and analyze data from suppliers’ ERP systems to better predict supply chain delays and cost changes is most important to stay competitive.
Senior leadership and employee buy-in are the most important factors to implementing data.
50% say the advanced tech skills gap applies to more than at least a quarter of their workforce and will be filled by hiring outside the organization.
38% say talent barriers exist to implementing or expanding use of AI.
Retaining
employees after they have been upskilled
was reported
to be the largest upskilling challenge.
Customer experience and understanding was ranked as the #1 most important factor to ongoing success.
92% 89% report revenue or assets under management (AUM) with some/moderate or significant growth. report earnings before interest, taxes, depreciation, and amortization (EBITDA) with some/moderate or significant growth.
27% say online sales have more than doubled in the past year.
2023 was a high-performance year compared to the top line in 2022. Ninety-two percent of respondents report growth in revenue or assets under management (AUM) compared to the previous year. Roughly one in three or 35% of companies polled say revenue or AUM grew significantly.
Earnings growth mirrored revenue growth. 89% percent of respondents report some/ modest or significant growth in EBITDA (earnings before interest, taxes, depreciation, and amortization). Thirty-one percent say EBITDA grew significantly. The year-toyear revenue and assets under management growth, paired with the EBITDA growth, trend is positive.
Which is better – private equity (PE) owned companies or private, closely held companies – does it matter? Our survey says yes. Forty-three percent of PE companies experienced significant growth in revenues and AUM as compared to 29% of closely held companies. EBITDA revealed a similar story, with 40% of PE companies reporting significant growth in EBITDA as compared to just 25% of closely held companies. Does this mean private equity has the secret sauce? It depends what you want. It’s true that private equity companies have a supply of almost unlimited capital, and generally can access talent easier than closely held companies. More important to this comparison, the objectives of PE companies are often shorter-term in nature than closely held companies. Private equity firms invest in businesses with the primary goal of creating a profit from a liquidity event, usually in a period of three to five years. Therefore, a higher emphasis is put on creating explosive growth in revenues and free cash flow during the hold period. Closely held companies often take a longer-term view on their investment returns, including Research and Development (R&D) projects and talent management.
Leading the pack were the technology and financial services industries, with 42% of these industry respondents reporting significant growth when compared to 2022. It’s no surprise that technology companies are experiencing explosive growth. They are helping organizations across all industries transform their business models, fueled by the advances in artificial intelligence and flow of information along the customer value chain. Although the financial services sector faced challenges in 2023 with higher interest rates and economic uncertainty, relief came from continued strength in the private equity market as well as from technology - as alternative data sources (like mobile device data and social media) have improved the decision-making process for asset managers.
Online sales are a key driver of revenue for most of our respondents. Forty-one percent say current online sales drive half to three quarters of revenue. Thirty-one percent report that current e-commerce amounts to a quarter to half of their revenue. Meanwhile, the pace of online sales is quickening. One in two respondents say online sales significantly grew year over year. Twenty-seven percent say online sales doubled in the past twelve months.
Our respondents report that e-commerce dominance (over half a company’s sales being generated online) increases substantially as revenues increase. This pattern makes sense as companies compete for relevance in a crowded internet. Larger companies with more resources have set the bar high when it comes to building modern, clean, safe, and user-friendly websites, as well as selling through Amazon. In addition, larger companies are able to dedicate more dollars for search engine optimization, bestin-class order fulfillment, and customer development personnel.
The larger the company, the higher their concentration of online sales*
When asked what they believe are the three most important things to their customers, respondents listed:
Construction and financial services industries lead the pack, with 35% and 38% reporting doubling e-Commerce growth over the past 12 months, respectively.
Forecasting and resource planning systems are used by most, but are aging for too many.
76% forecast monthly or quarterly – 7% continuously. 28% are forecasting using non-automated tools. 31% last updated their enterprise resource planning (ERP) system more than five years ago, 10% say more than ten years ago..
Seventy percent of respondents have an automated strategic planning system to assist with forecasting. Twenty-eight percent still use a manual system (like Excel). Two percent do not have a strategic planning system in place.
Manual systems are not only prone to error; they make the forecasting process too cumbersome and time-consuming. This ultimately ends up in less accurate and less frequent forecasting, which means companies are stuck being reactive rather than proactive in optimizing the performance of their business.
Updates to ERP systems are relatively current for most, yet alarmingly out of date for too many. Sixty-six percent of respondents have updated their ERP system within the past five years. However, 30% have not updated their system within the last five years and 10% not updated their ERP system in the past 10 years.
Organizations that have out-of-date ERP systems likely have on-premise applications and have not moved to cloud platforms that provide updates twice a year on average. Reasons for a delayed transition to the cloud may include concerns about functionality, or the cost of making the transition. As ERP applications become outdated, organizations run the risk of one of their most critical applications being unsupported, or no longer receiving security or compliance updates in areas like payroll. Cloud based platforms also avoid the expensive upgrades that on premise platforms require. 30% have not updated ERP systems in the past five years. One in 10 have not updated in the past 10 years.
Modern cloud ERP platforms are investing heavily in efficiency areas, particularly in AI, predictive analytics, and accounts payable (AP) and accounts receivable (AR) automation. Organizations can take advantage of these investments and leverage them to gain value out of their licensing expense. These predictive insights in the areas of supply chain management can make large impacts in areas like inventory cost management.
The hard work of closing the gap between advanced technology promise and progress.
leaders say that improving efficiency and profitability of products and services tops their list of current uses of advanced technology.
29% have fully implemented data analytics tools and processes.
38% say the most important success factor for implementation is building the digital skills of their people.
The long-held promise of applying analytics, AI, machine learning (ML) or intelligent automation to improve business decision making and business performance remains promising. Our research reveals progress is being made and more is left to realize.
The top three current uses of data analytics among respondents are to improve efficiency of product or service sourcing (68%), to better understand buyer behavior (65%), and improve profitability of products (67%).
Manufacturing industry companies have continued to embrace the usage of data analytics to maximize operational performance. The primary focus of advanced analytics has been through three main applications: predictive maintenance, yield/output/quality, and supply chain optimization. Predictive maintenance can predict repairs and machine failures in advance, essentially maximizing the operational use of your manufacturing assets. Maximizing yield and throughput, with an eye on quality, will allow companies to gain incremental sales through increased production capacity. And, advanced modeling on supply chains allows companies to optimize inventory planning while focusing on profitability management throughout their entire supply chain. Improving all of these areas with the use of data analytics will absolutely lower costs, drive profitability, and ultimately improve your customers’ experience.
70%
Strides are being taken and made by private companies and their investors on data analytics. Only 5% of respondents say they have no plans for implementation. Respondents report implementation of data analytics tools and processes in three broad buckets.
70%
We have fully implemented data analytics tools and processes.
We are currently implementing tools and processes which will improve our use of data analytics.
We are planning on implementing tools and processes which will improve our use of data analytics within the next 12 months.
87% of hospitality respondents reported that they either are currently implementing, or have fully implemented, tools and processes which will or have improved their data analytics. The hotel industry has stood apart from most other industry segments since the 1920’s when the first Uniform System of Accounts for the Lodging Industry (USALI) was introduced in New York. This standardized the chart of accounts across all lodging properties and is still the gold standard for the industry today when it comes to preparing and reporting to the franchises, lenders, and management companies. The USALI is now on its 11th edition and is continually updated for changes in generally accepted accounting principles. The benefit to this method of accounting is consistency, which also has pushed the industry ahead of the curve in being able to compare property to property. It provides benchmarking abilities unseen in other industries. Average occupancy and average daily rates segregated by location, brand, level of service-these analytics and many more comparisons can be created due to the consistency in the accounting, which has allowed the industry to be at the forefront when it comes to data analytics.
As in other periods of technology change, workforce talent and people skills drive the success of digital technology advances. In ranking the most important factors for a successful implementation, respondents say “buy-in and support from leadership,” followed closely by “building the digital skills and capabilities of our employees,” and “encouraging employees to adapt to a digital culture.”
Software project implementations are major investments and endeavors for organizations. These ‘out of cycle’ initiatives have a life of their own and best practices for success.
These include:
• Name success: Clearly spell out for the project team what success looks like, and what key performance indicators (KPIs) are going to be measured, as well as the rationale for the project.
• Identify the project team structures, roles, and responsibilities between IT and the business owners and how decisions will be made. Also identify these roles between internal team members and external consultants.
• Invest in project team education. Many modern systems have online learning platforms for self-study and conferences as well.
• In addition to project team and end user training, clarify what people’s roles will look like post implementation. This is one of the biggest concerns in change management and what the future will look like postimplementation. Often times, documentation is overlooked in favor of project speed and simplicity. This additional documentation can be very useful for team members not on the project team.
• Celebrate success: Team members spend many additional hours on these projects assisting in areas like testing and data conversion. Recognize their contribution to the project and organization.
• Determine post implementation roles and responsibilities and how ongoing support and optimization will be performed between IT, business owners, and external consultants.
Top three factors for a successful implementation
Buy-in and support from leadership
Encouraging employees to adapt to a digital culture
Ensuring the appropriate tools are in place
An effective communication system during and after implementation
Building the digital skills and capabilities of our employees
Cleansing inaccurate data in our system before implementation
The three top private company uses of AI and ML tools are for A) better serving customers/employees, B) better understanding data, and C) creating more efficiency in administrative and financial processes. Current utilization gives equal weight to all three uses among our respondents.
60% for Cognitive Engagement:
Customer service intelligent agents, internal sites for employees, product and service recommendation systems (e.g., Chat bots, AI decision making, customer personalization, etc.)
Using algorithms to detect patterns in data and interpret their meaning (e.g., anomaly and error detection, predictive analytics, decision support, etc.)
Using robotic processes for administrative and financial activities (e.g., AP automation, workflow processing, data extraction, etc.)
Cognitive Engagement: One of the older examples of AI is cognitive engagement, most commonly seen through the application of customer service chatbots. A large company that relies on this is Sephora, a beauty retailer. Sephora’s chatbot assists customers in product selection and offers personalized beauty tips, streamlining the shopping experience and providing instant support. For smaller companies, similar chatbots are commercially available within tools like Shopify or BigCommerce and provide an AI-enabled customer experience through a pre-packaged chatbot tool.
and protect both the company and its customers, which improves trust and security in digital transactions.
11% of respondents say they are not utilizing AI or ML presently.
Cognitive Insight: The payment processing business is at the forefront of using cognitive insight for anomaly detection and fraud prevention. PayPal uses sophisticated AI for anomaly detection. By analyzing millions of transactions, PayPal’s system identifies suspicious activities in real time, which is intended to reduce instances of fraud. In this case, AI is deriving insights from massive datasets to detect anomalies
Process Automation: There is an entire category of toolsets for automating business processes that can be applied to basic, routine daily tasks (e.g., coding a payable transaction) as well as complex, end-to-end business processes. One example of a highly complex automation is in the insurance space. Lemonade is a young insurance company (founded in 2015) whose business model heavily relies on process automation and AI. One of the ways it applies this technology is in drafting insurance policies and processing claims. This allows for faster service and reduces the workload on employees, theoretically leading to quicker claim resolutions and more personalized policy creation. Tools like Microsoft’s PowerAutomate have made this technology available to small and mid-sized companies and process automation remains one of the most efficient and lowest cost ways for companies to get started with AI.
The AI adoption gap between companies under $50M in revenue and over $50M in revenue is not surprising. Although not necessarily a new technology, AI is still in the early stages of maturity. This means that commercially available tools with AI capabilities that can be applied widely across the business are still limited and those that are available tend to be high-cost. Numerous startups have emerged in recent years to bring lower cost solutions to companies in specific industries, but these are still in their growth stages and are often not yet available to the marketplace.
Generative AI (GenAI) remains early in Gartner’s “hype cycle” meaning that the initial, easier use cases have started to lose their luster as businesses find out how difficult it is to pursue and achieve more complex, high-value applications from the technology. It still takes significant effort and internal focus to successfully implement most high value GenAI use cases.
Companies of all sizes should be focused on enabling AI and investing at a proportion that makes sense for the business. This means focusing on three key areas: 1) application
readiness, largely by making sure core applications and data are as cloud-enabled as possible; 2) data readiness, which is making sure your key business processes are collecting the right amount of relevant data, creating the right relationships between your systems, eliminating duplicate data, and making sure the relationships between all systems are clearly defined; and 3) people readiness, which is training and educating your staff on AI concepts and allowing high-potential users to start experimenting, in a controlled way, with AI tools.
There is a high probability that AI will impact most businesses in a meaningful way soon. Even if it doesn’t make sense to spend on the AI itself right now, businesses of all sizes should be engaging in readiness. To the extent there are experiments available with tools such as Microsoft CoPilot, we recommend licensing small groups of users with these tools and have them start evangelizing the use cases they discover.
Artificial Intelligence and Machine Learning:
The biggest reported benefits are predictable
Private companies and their investors report the biggest benefits of AI/ML initiatives are to gather and utilize information from the outside in, predict events needing immediate attention, understand and anticipate customer behaviors, and automate some repetitive tasks.
Artificial Intelligence and Machine Learning: Common barriers to current or future implementations
Between now and next stands a set of common barriers and obstacles our respondents report. Top among the barriers are integration with existing systems, the quality of data in existing systems, employee experience to drive implementation, and understanding the cost/benefit of the efforts. Here’s to the bold 20% who say no barriers exist.
Intelligence and Machine Learning: Ability to evaluate present and future value of investments.
We asked respondents if they have reporting and analytical capabilities to evaluate and maximize the value of current and future intelligent automation investments. The answer was yes and no. Yes, slightly over half (54%) are “able to analyze all aspects of the business to determine effectiveness of current investments and future opportunities.” Thirty percent say “yes, but are only able to analyze certain aspects of our business (i.e., specific functions, processes or data sets.”) The balance are the organizations saying “yes and no”: 11% say that reporting and analytics capabilities are still maturing along with master data and data quality.
Disparate systems and processes negatively affect a company’s ability to drive profitability. A few of the main reasons are:
• Increased operational costs due to excess time and effort spent on business processes, manual data collection, and
preparation for analysis. These processes are also more prone to errors and need staff to spend more time validating the results and correcting errors.
• Reduced ability to make decisions about the business in real-time: Relating operational data and financial data together provides the best support for executive decisions. If it takes a lot of effort to compile the data and calculate the KPIs, it makes it difficult to evaluate the business in real time and makes it unlikely the business can keep up with preparing that data for leadership on an ongoing basis.
• Revenue control: Real-time visibility to how your sales funnel is performing is critical to optimizing your marketing spend and forecasting your demand.
• Cost control: Understanding where and how your costs are growing is critical to sustaining profitability. Both overhead costs and direct costs need to be controlled in shorter increments than monthly or quarterly financial reporting cycles allow
for. The only way to get visibility to this information is by connecting your systems, especially your financial systems, and forecasting your KPIs using CPM or analytics tools like Microsoft PowerBI or Vena.
• Frustrations for high-performing employees: High-performing employees demand modern systems and generally want to spend their time analyzing, assessing, and transforming rather than processing and performing routine data crunching. Companies with low-maturity systems have challenges attracting and retaining high performing managers and employees.
Yes and no, reporting and analytical capabilities are still maturing along with master data quality
No, we lack the technology to support these capabilities
No, we lack the human capital capabilities to support these capabilities
Other (please specify)
Yes, we are able to analyze all aspects of the business to determine effectiveness of current investments and future opportunites
30% Yes, but only able to analyze certain aspects of our business (i.e., specific functions, processes or data sets
The hunt continues for skilled talent to make the most of advanced technology, internally and externally.
38% have made significant progress establishing upskilling programs. Almost 90% say they need to look outside the organization for talent that helps them rise to advanced technology readiness.
40% report retention of upskilled workers as a top challenge.
Technological upskilling is a work in progress for most.
It certainly takes an organization-wide effort to rise to the next level of advanced technology adoption and implementation, but the people within organizations clearly need new skills. Thirty-eight percent of responding organizations report that they have made significant progress in establishing upskilling programs that develop technical and digital skills. This is moving in the right direction, but there is still a long way to go as half have only made some progress and nearly 1 in 10 have made no progress. As we continue through this period of rapid evolution and technology change in this unprecedented climate, the importance of upskilling workforce via multiple channels cannot be overstated.
Of all the challenges in upskilling efforts in responding organizations, the big three are retaining employees who have been upskilled (40% rank as top challenge), followed closely by disruption of day-to-day activities (38%), and the effectiveness of learning and development functions (37%).
of the respondents need to look outside their organization to close the technological skills gap for a large percentage of their workforce.
Perhaps one of the reasons upskilled workers are hard to retain is that so many organizations are looking outside their organization for talent to close the technical and digital skills gap. Nearly half of respondents say they will need to resolve their skills gaps externally, supplementing at least 25% of their needs through outsourcing.
Across today’s business environment there is a general lack of available talent to fill the needs of open positions. This is especially true for highly skilled positions and key operational functions like accounting and finance. Major challenges that companies often face include the struggle to maintain key personnel, limit operational disruptions caused by turnover,
and create an internal culture that prioritizes professional development in today’s remote work environment. One solution that companies have utilized over the past few years has been outsourcing roles and responsibilities to third party providers.
Full-service outsourcing providers generally thrive in a remote work environment and can meet many of the key talent related challenges in a way that is often cost effective. Since outsourcing firms often have a full team of highly-skilled individuals that specialize in a range of industries and technologies, companies never worry about staff turnover and can access top talent that is able to upskill their existing team without the hiring hassle and need for talent management.
Everywhere they turn, our respondents see rising risks. And they are looking to turn risk into reward.
78% see inflation as the most concerning business threat. The next threats After inflation, supply chain disruption, cyber threats, and cost of capital are the most concerning to private company leaders.
32% have experienced a cyber incident or breach in the past 24 months.
The top five extreme or moderate threats in the view of our respondents are inflation (78%); supply chain disruption, cyber threats, cost of capital all (tied at 69%); and increasing tax burdens (68%). Inflation has ascended as supply chain concerns have eased, though supply chain concerns remain.
Our respondents’ top concerns revolve around threats which will increase operating costs and compress profit margins. Inflation and interest have forced companies to re-think investments and reduce working capital. Supply chain issues have eased since the COVID-19 pandemic, but pockets remain as geopolitical risks and climate change will continue as disruptors.
Cyberattacks are becoming more sophisticated thanks to the introduction of GenAI, which can write a convincing phishing email in a fraction of the time it takes a human.
The Big Three Cyber Risks
Cyber risks appear to be a source of attention and action for private companies nationally. We are not surprised, as one-third say they have experienced a cyber incident in the past 24 months. The three most common, preventive cyber security initiatives respondents have in place are active monitoring, training, and cyber assessments.
Utilize Active Monitoring
Fewer than half of respondents have an incident response plan, cyber insurance, or considered penetration testing. Cyber risk awareness is keen, but readiness may need further investment.
Performed Cyber Assessment 54% Provide Cybersecurity Training
While private companies have an awareness of cybersecurity risks, they have only taken limited steps to combat them. This lack of preparedness was laid bare when only slightly more than half of respondents were shown to be providing security training, conducting cyber assessments, or actively monitoring their environment, while less than half possessed an incident response plan, acquired a cyber insurance plan, or executed penetration testing. Taking proactive steps to prevent an attack is exponentially more cost effective than responding to a data breach or cyber incident caused by unaddressed vulnerabilities that attackers leveraged to attack a business.
The current state of cybersecurity initiatives. What’s not in place to rise to cyber risks?
The technology industry reported the highest percentage of cyberattacks over the last two years, a number that is double the average of other industry respondents. While it may be surprising that the technology industry is so susceptible to technology-related threats, there are several reasons why this is the case, including:
• They are early adopters of new technology solutions that may not have mature security.
• They are often providing services to many customers, making them candidates for supply chain attacks.
• They store sensitive information such as intellectual property that is desirable to cybercriminals.
68% expect growth in their sector to improve in the year ahead.
Close to half forsee a sale of their business. Value creation efforts, regardless of sale plans, center on upgrading operations, talent, R&D, and sales infrastructure.
Poised for growth and actions to make the most of opportunities
With solid financial performance in 2023, private companies and their investors believe more economic growth is on the horizon.
97% say economic growth will stay the same or improve.
2
of 3
think it will improve.
The economy looks to be poised for continued growth. The question is how are organizations going take advantage of the opportunity?
Positive economic growth forecasts indicate an anticipated steady increase in mergers and acquisitions (M&A) activity in 2024. Private equity firms and corporate buyers are expected to be a driving force behind the rise in M&A transactions, as they find themselves armed with capital reserves after low M&A volume during 2023. Organizations are poised to leverage M&A transactions as strategic tools to capitalize on emerging opportunities and strengthen their competitive positions by expanding their market presence and diversifying products or service offerings through strategic acquisitions. We are seeing the uncertainties and risks that remain due to fluctuating interest rates and inflationary pressures being addressed through thorough due diligence processes, strategic tax planning, and mindful integration postclosing. Noticeably, sophisticated parties to a transaction are increasingly focused on the tax policies and regulations that can materially impact the economics and/or the feasibility of an M&A transaction.
In the past year, value creation efforts spanned many activities for our respondents from launching new products and services to engaging in mergers and acquisitions. The most common value creation activities have been:
60% added new products and services.
44% extended operations to new territories.
38% (tied) localized business processes and outsourcing functions to third parties.
70%
The majority of law firm respondents reported launching new products and services to create value. In a constantly evolving market, law firms are proactively launching new services in order to increase profitability. Firms are looking for external growth opportunities through strategic mergers/laterals into new practice areas. This highlights the legal industry’s stance towards embracing challenges head on. The law firm industry has demonstrated remarkable resilience, proving the industry is committed to embracing innovation and fostering growth, while still keeping a pulse on the dynamic needs of their clients.
The three biggest or top ranked keys to future growth according to private company leaders closely mirror actions taken in the past year to create value. E-commerce tops the list of most important to growth, followed by new products and entering new markets.
37% say e-commerce is the biggest key to growth.
36% say new products are the biggest key.
34% say entering new markets is key.
We suspect the best of the best growth performers will do all three and more successfully in 2024 and beyond. As a side note regarding new products, 30% believe climate change initiatives will lead to significant new product and service opportunities.
In response to 2023 headwinds experienced throughout the temporary staffing industry, firms are seeking to minimize the risks associated with overspecialization through a broadening of service offerings. It is interesting to note that all staffing companies reported extending their operations into new categories. This includes both expansion into new geographic territories, as well as a diversification into new staffing industry vertical sub-specialties.
70%
For the acquisitive in our survey, a variety of challenges are apparent. The most difficult part of growth through acquisition?
1. Finding quality targets at 30%
2. Reasonable acquisition prices follow at 18%
3. Post-acquisition integration challenges at 18% (proving once again, as we have learned in our other surveys, that living happily ever after following a merger is hard work)
It is not surprising that 30% of survey respondents are finding it difficult to indentify quality acquisition targets in today’s deal environment, regardless of industry sectors. After two years of unbridled M&A activity, which we might never see again, M&A volumes have declined 20-30% in 2023. Quality deals were tough to come by last
year, and whenever they did, these assets were sold in highly competitive auction processes, where most often the highest bidder won. How do you differentiate yourself against other strategic and financial buyers? Building relationships with smaller competitors, attending local industry events to find potential targets, and networking with business brokers might help you unearth deal opportunities that others might not focus on. Smaller companies also tend to trade at lower multiples. Planning your acquisition strategy prevents poor performance.
Finding reasonably-priced targets is one challenge, the other, which cannot be discounted, is post-closing integration. Based on our experience, deal integration should be fully engaged during the pre-closing due diligence. Ideally, the integration team should be working hand-in-hand with the deal team.
We asked organizations if they had sale plans on the horizon. The answer is definitively yes for some. It’s the very nature of privately-held businesses and the sun-setting of the Baby Boomer generation that leads so many to grapple with succession planning. So, it’s no surprise to learn that 45% of respondents are probably or definitively considering a potential sale of their business. We are a bit surprised (but encouraged) to see 54% saying they are probably or definitively not selling – possibly because of a new generation of owners are taking over.
We asked what is needed now or soon to keep your company competitive. The responses fall into two buckets. Things you can’t control, like stabilization of inflation and interest rates, and things within an organization’s control, like gathering and analyzing data or other information to predict supply chain, customer behavior, and whether employees are at risk of leaving the company.
While performance in 2023 was strong among private companies and their investors and the outlook for growth is positive, respondents have clear priorities for maximizing future value. Upgrades to operations (process and procedures) lead the list of priorities at 32%, followed by upgrades in organizational structure/talent, financial reporting, R&D, and sales infrastructure.
This survey was conducted online in conjunction with the research arm of FINN Partners in February 2024. Respondents had to be senior leaders (C-level, owners, etc.) of privately held or private equity owned companies generating $10M in annual revenue or more. A total of 1,000 respondents took the survey across a wide array of industries.
Eric J. Casazza. Eric is Citrin Cooperman’s managing partner of the Digital Services Practice. He has more than 27 years of experience leading information technology organizations and enterprise solution programs and strategy including ERP, CRM, cloud productivity, integration, and business analytics.
Nichol Chiarella. Nichol is a partner and leader of the firm’s Tax Mergers and Acquisitions Practice and has around two decades of experience in public accounting. She provides high-level tax planning and consulting services related to buy-side, sell-side, and restructuring transactions involving private equity firms, closely-held businesses, business owners, and high net worth individuals within the technology, manufacturing and distribution, wholesale, retail, cannabis, health care, real estate, staffing, and professional services industries.
Dominic DiBernardo. Dominic is a partner in the firm’s Digital Services Practice with 15 years of experience in financial planning and analysis (FP&A). He has a passion for helping companies make the transition to a data-driven culture, guiding them through digital transformation leading to both operational efficiency and substantial bottom-line results.
Mark L. Fagan. Mark is the firm’s managing partner of Industries and has over 35 years of audit, tax, and business advisory experience. He serves clients in a wide range of industries ranging from privately held middle market firms to larger, complex, multinational organizations. He specializes in counseling businesses and CEOs in the areas of business formation, profitability enhancement, revenue recognition, and mergers and acquisitions.
John Fitzgerald. John serves as the managing partner of the Long Island office, as well as leader of the firm’s Law Firms Industry Practice. With more than 30 years serving clients, he has extensive experience advising closely held businesses across multiple industries, including legal and professional services, manufacturing and distribution, and real estate.
Sylvie Gadant. Sylvie is the managing partner of Citrin Cooperman’s Transaction Advisory Services (TAS) Practice and a partner within the firm’s Financial Services Industry Practice. She leads buy-side and sell-side due diligence engagements for private equity firms, independent sponsors, family offices, and strategic buyers.
Bob Gilbert. Bob is a partner and co-leader of the firm’s Restaurants & Hospitality Practice and an integral member of the firm’s franchising commitee. He has managed some of the larger and more complex tax and audit engagements pertaining to those industries.
Mark Henry. Mark is a partner and coleader of the firm’s Manufacturing and Distribution Industry Practice. He has significant experience providing audit, financial reporting, and business consulting services to clients in various industries, including but not limited to manufacturing and distribution, professional services, and technology.
BJ Hoffman. BJ is partner and leader of the Professional Services Industry Practice and Staffing Industry Practice with over 25 years of experience in the areas of audit, tax, and litigation support. He serves clients in a wide range of industries, including closely held entities in staffing, healthcare, and franchising, as well as law firms.
Jennifer Hogencamp. Jen is a partner in the firm’s Restaurants & Hospitality Industry Practice, leader of the Hotels & Lodging Industry Practice, and has almost 20 years of public accounting experience. She provides services to a wide array of clients including those in the hospitality (hotels and restaurants), manufacturing and distribution, and non-profit industries. Jen works with some of the largest hospitality management companies in the country.
Kevin Ricci. Kevin is a partner within the Risk Advisory, Compliance, and Cybersecurity Practice. He has over 25 years of extensive experience in technology services including consulting, security assessments, cybersecurity awareness training, social engineering simulations, IT auditing, fractional CISO, project management, database development, data analysis, and compliance services including PCI DSS, for which he is a Qualified Security Assessor (QSA).
Steve Ronan. Steve is the chief strategy officer (CSO) at Citrin Cooperman where he is responsible for the firm’s long-term strategy, transformation, innovation, and operational excellence. In his current and previous roles, Steve has driven growth and profitability, transformed operations, and created outsized competitive advantages through technology and service innovation for Fortune 500 and middle market organizations.
Michael Zyborowicz. Mike is the firm’s managing partner for the Business Process Outsourcing Practice and has 14 years of accounting experience. He provides general audit and business consulting services, as well as consultation on internal control matters and financial statement preparation to clients in the staffing, franchise, and construction industries.
“Citrin Cooperman” is the brand under which Citrin Cooperman & Company, LLP, a licensed independent CPA firm, and Citrin Cooperman Advisors LLC serve clients’ business needs. The two firms operate as separate legal entities in an alternative practice structure. The entities of Citrin Cooperman & Company, LLP and Citrin Cooperman Advisors LLC are independent member firms of the Moore North America, Inc. (MNA) Association, which is itself a regional member of Moore Global Network Limited (MGNL). All the firms associated with MNA are independently owned and managed entities. Their membership in, or association with, MNA should not be construed as constituting or implying any partnership between them.
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