Those that say it’s lonely at the top have obviously never had PE partners breathing down their necks. (we’re only partially kidding.)
Private equity firms require a whole new set of skills for CEOs, especially if you’re transitioning from bootstrapping or solely with venture capital funding. Their vision for the company may have nothing to do with your team, your customers, or other measures of success you’re accustomed to. It can all be a recipe for disaster, especially in this volatile economic climate.
To help understand how to succeed as a PE-backed CEO, we tapped three of our top coaches who come from years of executive leadership experience with private equity partners:
1. Make sure you can win
Before you take the deal or join a PE-backed company as an executive, make sure you know what you’re getting into.
Says coach and three-time CEO Douglas DeBoer, “I’ve seen a lot of people take positions where it’s impossible to win. Either the brand is too far gone, or the goals are too hard, or the product doesn’t work. It’s not you in that scenario; 99% of the people who take the position are going to fail.”
Do a thorough evaluation of the company with an eye on what private equity cares about the most. That may change based on each PE investment thesis, so you’ll have to comb through an internal audit to determine what matters.
“Your first focus is to do your homework and keep a holistic perspective on the health of the company,” says DeBoer. “The first two or three months should be all about digging deep to figure out what the underlying issues are.”
You should evaluate every aspect of the business, including:
- Cash flow
- Asset management
- Debt and liabilities
- Product portfolio
- Customer satisfaction and retention
- Brand equity
- Employee turnover and team performance
- Board management
“I had an experience, where, once I arrived, I realized we had debt issues the board wasn’t aware of,” says DeBoer. “I was able to announce that early, and they could understand that the issue was from previous management and adjust expectations accordingly. Then it was up to me to fix it.”
You never know what you’re going to find. But the sooner you understand the lay of the land, the easier it will be to set realistic goals — and communicate any findings to your PE partners so they can adjust their expectations.
2. Understand how PE companies think about your business
That’s because those expectations can be set in stone, depending on the company. Make sure you continually adjust those expectations based on performance as needed. You always want to win, of course, but as we all know, it doesn’t always go according to plan.
That’s when you need to put yourself in your PE partner shoes, says coach and successful serial entrepreneur Ramona Cappello. “Private equity isn’t just thinking about your business. They’re putting companies together to generate greater scale, leveraging different angles of different businesses. They’re looking for synergies that help pay back the purchase price.”
Most PE cycles last five years or less. If you’ve come in at year three, you have even less time to get across the finish line. You need to think about:
- Where are you expected to get to?
- Do you have the right team in place to get there?
- How will you deliver ahead of that plan?
With private equity, it’s all about payoff. “You have to think about the fastest, cheapest way to get to the promised land. Speed is one of the most important aspects, and you need to know what the goal is with your company and why they invested in you,” she says.
3. Don’t panic with economic volatility
Here’s where it gets really challenging: Your PE partners don’t care about whether or not macroeconomic forces impact your business, like a recession. They care about the bottom line.
But that’s not cause for panic, advises coach and former President of Mood Media Ken Eissing. “A leader of a private equity-backed company needs to really understand both the bad and the good that can come from a recession,” he says. “Think through all of the scenarios. It’s not necessarily always a bad thing, depending on your industry.”
As you look to recession-proof your business, evaluate the impact on both your operations and your customer demand. The important thing is to have a plan and clearly communicate it to your PE team. “You want to proactively plan and address any issues that may arise,” says Eissing. “What levers do you need to pull if xyz occurs?”
When you break bad news to your PE partners, make sure you’re ready with opportunities and solutions.
- Know your risks and what steps you’ll take to mitigate them.
- Create a contingency plan for those out-of-control scenarios.
- Be proactive to address issues that come up.
It all comes back to the original investment thesis, and how you’ll perform against it. Says Eissing, “You have to keep in mind why they bought your company in the first place, and what they’re trying to accomplish.”
Learn more with our free ebook, How Not to Get Fired as a PE-Backed CEO
Filled with top tips from three of our world-class coaches, all former CEOs at PE-backed companies, this five-step playbook will help any CEO succeed with private equity partners at the table, so you’re not left behind.