Why financial engineering alone will not generate the returns you need

Operations, tech stack, and finance function. The three durable levers most buyers underuse.

Hello, and welcome back to Buyout Diary.

This issue exists because several of you specifically asked for it.

When I ran the recent reader survey, the question that came back most often was some version of this:

• How do you actually create value after you have closed an acquisition, beyond the financial engineering everyone talks about?

• How do you make the business worth more than the sum of its parts, in a way that does not depend on cheap debt, market multiples, or selling at the right moment?

It is a fair question. It is also one most ETA content avoids because it is harder to write about than deal sourcing or financing.

This issue is the answer.

We are going to look at three durable value creation levers that work at SME scale: operations, tech stack, and finance function. None of them are exotic. All of them are underused by first-time acquirers who have spent so much time getting to the close that they have not properly thought about what comes after.

If you are an active operator already running an acquired business, this issue will give you a framework to assess where the value is in your own operation. If you are a searcher preparing for what comes after closing, it will give you something most first-time buyers do not have: a clear picture of what your first twelve months should actually look like.

1. Why Financial Engineering Alone No Longer Works

Before getting into what to do, it is worth understanding why this conversation matters.

For most of private equity’s history, value creation was driven primarily by financial engineering. Firms used debt to acquire businesses, paid down the debt over time, and exited at a higher multiple than they entered at. The mechanics were straightforward and the returns were strong without requiring meaningful operational change.

That model has been weakening for two decades. As Mike Hinckley, founder of Growth Equity Interview Guide, summarises in his analysis of private equity operations, since 2010, 47% of value creation has come from operations, up from 18% in the 1980s. Meanwhile, financial engineering’s contribution to value creation has fallen to 25%, from 51% in the same period. A 2024 Simon-Kucher study found that 46% of private equity returns now come from business improvement, eclipsing financial engineering and multiple arbitrage.

The shift accelerated through the recent rise in interest rates. Borrowing costs have moved from historic lows to 8 to 9% in many markets. The same MOIC that once required 5% annual EBITDA growth now requires 10 to 12% growth to maintain the same return. Cheap debt is no longer doing the heavy lifting.

The implication for self-funded buyers and HoldCo entrepreneurs is direct. If institutional private equity, with all its leverage and tax structuring expertise, can no longer rely on financial engineering, then a buyer acquiring a single small business with a single bank loan certainly cannot. The returns have to come from somewhere else.

That somewhere else is the business itself.

2. The First Lever: Operations

When most people hear “operational improvement,” they think of cost cutting. Reducing headcount, squeezing suppliers, eliminating discretionary spend. That is one form of operational change. It is also the form most likely to destroy value rather than create it, particularly in a small business that has been built on the founder’s relationships and judgement.

The operational changes that actually create durable value in SMEs are different.

Process documentation and standardisation. Most owner-led small businesses run on the founder’s memory. Quotes are calculated based on instinct. Pricing decisions are made in conversation. Supplier relationships exist in someone’s head. After acquisition, this becomes the single biggest fragility in the business. The first operational priority for any new owner should be capturing the institutional knowledge before it walks out the door.

The right pace of change. This is where my MBA research findings on operator fit and delegation become directly relevant. When I interviewed eleven acquisition entrepreneurs about how they ran businesses post-acquisition, the consistent finding was that the most successful adopted what I called a phased delegation approach: starting with operational support and gradually transferring full profit and loss responsibility based on demonstrated performance and the development of trust. The buyers who tried to change too much in the first ninety days consistently produced worse outcomes than the buyers who waited, observed, documented, and then changed. This applies whether you are running the business yourself or delegating to an operator.

Removing the founder dependency that kills delegation. Many small businesses have a structural problem the new owner inherits without realising it. The previous owner has not built management depth because they did not need to. The first operational hire after acquisition is often a number two who can take operational decisions off the new owner’s desk. Without that hire, the new owner becomes the bottleneck and the business cannot scale.

Customer concentration and relationship distribution. If the top three customers represent more than 40% of revenue, the operational priority is reducing that dependency. This is not about replacing customers. It is about ensuring those customer relationships are held by the business rather than by individuals who could leave. Documented account histories, multiple touchpoints, and structured renewal processes turn fragile customer relationships into durable ones.

The principle that runs through all of this: operational value creation in SMEs is rarely about doing more with less. It is about turning the business from something that depends on specific people into something that depends on documented systems. That transformation is what creates value the bank, an investor, or a future buyer can rely on.

3. The Second Lever: Tech Stack

Most small businesses run on a technology stack that was built incrementally over fifteen or twenty years. A spreadsheet from 2008 still drives quoting. The CRM is QuickBooks notes. The ERP is the founder’s email archive. The reporting system is whatever the bookkeeper assembles in Excel at month-end.

This is not unusual. According to Accenture research, a massive 92% of mid-sized companies have room for operational improvement, and the technology gap is one of the largest contributors to that figure. For a self-funded buyer, this gap is genuinely good news. Modest technology investment in an acquired SME often produces returns that institutional acquirers cannot replicate, because the starting point is so much lower.

The question is what to invest in and in what order. Three priorities.

Reporting before automation. The first technology priority post-acquisition is not optimising existing processes. It is being able to see what is actually happening in the business. Real-time financial reporting, customer-level profitability analysis, and operational dashboards. Without this, every other technology decision is being made in the dark. European SMEs have strong cloud accounting options that integrate easily with simple dashboarding tools: Xero is widely used across Europe and the UK, Exact and Twinfield dominate the Dutch and Belgian markets, DATEV and Lexware are the standard for German Mittelstand businesses. Whichever platform fits the country and sector, the priority is the same: monthly numbers visible in something other than a spreadsheet someone updates manually at month-end.

CRM as institutional memory. A small business with no CRM has no institutional memory of its customer relationships. Every salesperson holds their own list. Every customer touchpoint goes undocumented. When someone leaves, the relationships leave with them. Pipedrive is the most widely adopted CRM among European SMEs, in part because it was built in Estonia and designed around the way smaller European businesses actually sell. HubSpot is a strong alternative, particularly for businesses with a marketing component. For very small operations, a well-structured Notion workspace can serve the same function at lower cost. I have built my own customer relationship system in Notion for exactly this reason. The platform matters less than the discipline. The principle is that customer history sits somewhere visible to the business, not somewhere private to a salesperson.

Automation where it removes bottlenecks. Automation is most valuable when it removes a specific human bottleneck rather than as a general efficiency play. Automated invoicing, automated payment reminders, automated quote follow-up. These are not glamorous projects but they reliably free up hours per week that the new owner or operator can redirect into more valuable activities.

What to avoid: large enterprise systems implemented in the first year. ERP migrations are project failures waiting to happen at SME scale. The technology choices that create value early are small, modular, cloud-based, and easily reversed if they do not work. Anything else is a distraction from the more important work of understanding the business.

4. The Third Lever: Finance Function

This is the lever first-time buyers most consistently underestimate.

In most owner-led small businesses, the finance function consists of an external bookkeeper, possibly a part-time accountant, and a once-a-year visit from the firm that prepares the statutory accounts. That structure is sufficient to keep the business compliant. It is nowhere near sufficient to support value creation.

The financial intelligence required to make good operating decisions in an acquired business is genuinely different from what compliance accounting produces. Three areas matter most.

Management accounts that mean something. Statutory accounts produced annually are not management accounts. They are a backwards-looking compliance document. Real management accounts show monthly performance, customer-level and product-level profitability, gross margin trends, and the working capital picture. Setting these up in the first six months post-acquisition is one of the highest-return projects a new owner can undertake. The cost is modest. The decision-making improvement is significant.

Working capital discipline. Many SMEs carry unnecessary working capital because nobody has ever measured it. Receivables sit too long. Inventory levels are higher than the business actually needs. Supplier terms have not been renegotiated in years. A focused working capital review in the first year of ownership often releases enough cash to fund the operational and technology investments the business needs without requiring additional debt. This is genuine, durable value creation. It is not financial engineering.

The fractional CFO question. Most small businesses cannot justify a full-time CFO. But almost every small business benefits from CFO-level thinking applied for a few days a month. Fractional CFO arrangements have become significantly more accessible over the past five years and are one of the highest-leverage hires a new owner can make. The fractional CFO is the person who builds the management reporting, designs the working capital review, and helps prepare the business for whatever comes next, whether that is additional acquisitions, an investor round, or eventually a sale.

The finance function is not a cost centre. It is the diagnostic infrastructure that tells you what is actually working in the business and what is not. Without it, you are operating on instinct, the same way the previous owner did. With it, you have something that previous owner did not have, which is genuine financial intelligence.

5. The Sequencing Question

The three levers are connected. You cannot meaningfully improve operations without management reporting that tells you where to focus. You cannot build management reporting without basic technology infrastructure. You cannot make technology decisions without understanding where the operational pain points actually are.

In practice, the best sequence in the first year of ownership tends to be roughly the following.

Months one to three: observe and document. Resist the urge to change anything. Build the relationships with the team you have inherited. Capture the institutional knowledge from the founder before they fully disengage. Implement basic management reporting and a CRM if neither exists. Identify the two or three operational pain points that are genuinely costing the business money or growth.

Months four to six: make the highest-impact operational hires. The number two who removes the bottleneck. The fractional CFO who builds the financial intelligence. The customer success or operations role that addresses the specific pain point identified in the first quarter.

Months seven to twelve: focused operational improvement. Working capital review. Process standardisation in the highest-priority area. Customer concentration reduction. Pricing review. The technology investments that flow naturally from what the management reporting has revealed.

This sequence is deliberately conservative. The buyer who tries to do all three levers simultaneously in the first ninety days produces worse outcomes than the buyer who does them in sequence, because the second buyer is making decisions based on what the business is actually telling them.

That patience is itself a form of value creation. The new owner who shows the business and the team that change will be deliberate, sequenced, and based on evidence builds the trust that everything else depends on.

6. What Good Looks Like, Twelve Months In

If the first twelve months have gone well, the business looks measurably different from how it looked at acquisition. Not in the headline numbers necessarily, though those should be moving in the right direction. The change is in the underlying infrastructure.

Documented processes where there were none. Real management reporting on a monthly cadence. A CRM with customer history. A finance function that produces forward-looking analysis rather than backward-looking compliance. Customer relationships that exist in the business rather than in individuals. A management team that can run the business when the owner is not in the room.

None of this is glamorous. None of it is what financial engineering optimises for. But all of it is what makes the business worth meaningfully more than what was paid for it, in a way that does not depend on multiple expansion or favourable debt markets.

It is also what makes the business acquirable by the next buyer at a higher multiple than you paid, because the institutional infrastructure that future buyer will pay for has been built into the business under your ownership.

That is what value creation looks like when financial engineering is not doing the work. And it is the work most ETA buyers underinvest in, because deal closing feels finished when it is really just the beginning.

​Bonus: My MBA Thesis on Post-Acquisition Governance

A note from me to the readers who have been with this newsletter from the beginning.

The phased delegation finding I referenced in Section 2 comes from my MBA dissertation, which I completed in August 2025 at the University of Greenwich and Saxion. The full thesis is titled “An Investigation of Governance Structures, Control Mechanisms, Incentives, and Knowledge Transfer in HoldCo-Led Small Business Acquisitions.” It draws on eleven semi-structured interviews with US-based acquisition entrepreneurs and investors, with thematic analysis covering governance structures, principal-agent dynamics, delegation and control, and tacit knowledge transfer.

If you found this issue useful, the full 12,000-word thesis goes significantly deeper into how acquirers actually structure post-acquisition governance, what works, what fails, and why operator fit matters more than almost anything else. There are coding trees, interview excerpts, and a full literature review on top of the empirical findings.

It is yours, free, in exchange for an email address.

​→ Download the full MBA thesis here​

This is the kind of resource I think Buyout Diary readers should have access to. Genuinely original research on the post-acquisition phase, written from the perspective of someone who is also building in this space rather than just observing it.

Hit reply and tell me: which lever feels hardest for you right now, building the operational systems, getting the technology stack right, or putting proper financial intelligence in place?

I read every reply.

See you next Monday.
​
Alexander