How Value Creation Is the Cornerstone of Successful Private Equity Investing

The Sociable sat down with César DOnofrio, CEO of Making Sense, a technology partner that blends AI with user experience to drive innovation and business transformation. Securing private equity funds has become increasingly important in business acquisitions.

Volatility has led to the slowing of exit activity for a number of reasons, making targeted valuations more difficult with an extended hold period. In fact, according to an EY survey, up to 81% of private equity executives say that holding periods have extended three years longer than the historical average.

This is where utilizing new technology with data analytics tools that combine customer-specific performance metrics can be a great help. So, Cesar shares his 15 years of experience in helping mid-market companies modernize their operations and his insights on how technology can increase scalability, reduce inefficiencies, and enhance business value.

How can technology increase EBITDA and contribute to a higher valuation in mid-market companies?

One of the first things we aim for our clients would be efficiency and cost reduction. Generally, our client’s invoice is between the smallest, 50 million up to one billion. So, how can technology help a company that is about to be acquired by a private equity firm? Firstly, it helps by not having to hire masses of people. We have a healthcare client in Texas who came to us saying that if they wanted to increase their revenue by one million, they would need to hire at least two more people to handle the number of policies that they have to deal with. In this case, with the technology that we gave them, they could grow by 50 million in revenue and still not need to hire extra people. It all comes down to efficiency and how technology can help with scalability.

The next thing worth discussing is modernization. Moving forward, more and more companies will need to use AI, to create value and reduce costs. So we prepare our clients for having more modern applications so that they can generate more useful data to achieve these goals. And finally, sometimes, we have to come in and completely change the model through digital transformation.

We had a client in legal services who sometimes had to resolve disputes when the parties didn’t get along. Before going to trial, they might go to mediation, where an arbitrator reviews the case. During the COVID-19 pandemic, those meetings couldn’t occur, so we had to help them convert those services into videoconferencing. This allowed them to provide their services throughout the New York state.

As a company CEO, anything that involves staying ahead of innovation and changing the business model so your company always stays on the cutting edge is super important. 

How can founders assess which parts of their operations would most benefit from technology improvements?

Scalability is key, along with analyzing time-consuming processes that can be optimized over time, reducing inefficiencies, and identifying data gaps. I place particular emphasis on data, systems, and digitalization because AI will play an increasingly significant role in the coming years. For companies, if you’re still relying on manual processes like paper and pencil, applying AI will be very difficult. First, you need to digitize your operations, and then you can begin leveraging data analysis—it’s a step-by-step process.

How can technology help founders make the company less dependent on people for growth, making it more scalable and appealing to buyers?

Technology is crucial in making companies less dependent on individuals for growth and enhancing scalability and appeal to potential buyers. You only have to look at the generational shift we’re witnessing—many baby boomers who own businesses are approaching retirement. A lot of these companies are still managed using outdated, manual methods like paper and pencil. This creates a massive opportunity for digital transformation. Actually, there’s an estimated $82 trillion set to transfer between generations, and many of these business owners need help modernizing their operations.

A logistics company I’m working with, for example, had two people managing all operations—everything was in their heads. So now we’re helping them digitize their processes, making them less dependent on specific individuals. That’s where technology comes in, turning their institutional knowledge into a system that anyone can manage.

Over 70% of leaders of mid-market companies see digital transformation as a priority in the next two years. But they face challenges like limited budgets and staff. Cloud-based solutions and managed services offer a way to scale without hefty upfront costs. Another hurdle is internal resistance—people are often hesitant to change. To overcome this, it’s important to leverage existing team knowledge, provide training, and clearly communicate the benefits of transformation. 

What are common technology-related risks that buyers scrutinize, and how can founders address these before a sale? 

When buyers evaluate a company, they focus on key technology-related risks, so I’ll take you through what some of the main ones are and what the solution should be:

Scalability: They assess if the technology infrastructure can support growth in users, data, or transactions. Founders need to invest in cloud-based, modular systems that scale with the business, ensuring the company can handle larger workloads and customer demand.

Technology Debt: Buyers will also scrutinize if the tech stack has been patched together in ways that will require costly updates. Founders should refactor old code, retire unnecessary tools, and maintain proper documentation to show a solid, well-maintained foundation.

Lack of Integration and Automation: Buyers tend to expect efficient integrated systems and so if key functions are disconnected or rely on manual processes, it hinders scalability. Founders should adopt integrated tools, like CRM or marketing automation, and automate repetitive tasks to demonstrate operational efficiency.

Copyright Issues: Buyers will watch out for any unlicensed or copied code that can lead to them to run into any legal risks. Founders should audit their codebase to ensure compliance and remove unauthorized libraries, replacing them with licensed alternatives to avoid copyright disputes.

IP ownership: Lastly, buyers are concerned about whether the company truly owns its intellectual property. Founders must ensure proprietary code is developed in-house or that full IP rights are transferred from third-party developers, supported by clear legal agreements.

To wrap things up, MakingSense has more than 15 years of experience adding value to the mid-market sector, what are the key considerations when modernizing legacy systems within this type of company?

When modernizing legacy systems in mid-market companies, like those MakingSense has supported for over 15 years, you need to take several key factors into account. I think extensive experience in the American mid-market obviously helps to deeply understand the specific needs of these companies. We combine this with our Silicon Valley experience and continuous exposure to the world’s leading tech ecosystem. 

Moreover, we always prioritize UX/UI in everything we do, ensuring that every technological update not only functions well but also delivers a superior user experience. This approach makes us a strategic partner in modernizing legacy systems, ensuring that our solutions are scalable, future-proof, and aligned with the business’s goals.

This article includes a client of an Espacio portfolio company