For many founders looking to sell the business they’ve spent years building, partnering with a private equity firm is the best path forward. For founders considering this course of action, it’s essential to know what private equity firms look for in a CEO or management team they are considering backing. While elements like investment criteria will vary by firm, some are more universal, such as the skills and traits firms seek in a CEO. This is especially true in the lower middle market, where private equity firms expect to work closely with the founder or management team. In this case, finding a cultural match is just as important as a financial fit.
Though not an exhaustive list, these are a few of the most desired skills and leadership traits private equity firms find attractive in a future partner.
A CEO who cares about people
Private equity firms seek CEOs who value their people. CEOs focused on safety, who call their employees by name and treat them with respect are highly valued. No CEO would say they don’t value their people, but it is evident in employee retention figures, workplace conditions and the CEO’s behavior during employee interactions.
A CEO focused on results
The ideal CEO is the opposite of someone who says, “I feel like we’re moving in the right direction,” or shares some other abstract concepts of success. A goal-oriented CEO will have clearly articulated measures of success, such as driving EBITDA growth or improving margins, with quantifiable metrics or key performance indicators. CEOs who can translate non-quantitative aspects like culture into measurable results are even more attractive to private equity firms, as it further establishes their skill of tracking and attaining targets.
Additionally, PE firms are looking for CEO partners who maintain awareness of company performance. CEOs should proactively reach out to their PE partner to discuss solutions for improvement in areas where performance may be lagging, rather than waiting for problems to fix themselves.
A CEO who is transparent and tells the whole story
Private equity firms prefer to speak in facts over generalities. The story tends to change over time if a CEO speaks in vague, abstract terms when discussing their company. No PE firm wants to encounter surprises or moving targets.
CEOs who are transparent and share the facts about the business demonstrate a clear grasp of the company and the vision they want to accomplish with their private equity partner. This helps PE firms be more confident that they are getting the whole story and that it will remain consistent over time. This also ensures communication throughout the partnership remains open and clear to all parties.
A CEO with a sense of urgency
For PE firms and portfolio companies, which often have aggressive growth goals as a motivation for taking on an investor, time is of the essence. The entire business model for PE firms relies on driving value creation over a certain period of time. Urgency doesn’t necessarily mean working nights and weekends but rather the ability to focus on specific initiatives and not waste time.
For CEOs of potential portfolio companies, having that sense of urgency ensures they are never a bottleneck to that process. PE firms strive to partner with CEOs with an innate drive to grow their shared investment without a need for the PE firm to get too in the weeds at the company.
A CEO who accepts and assigns responsibility
PE firms prioritize CEOs who take personal accountability for the company’s results, good or bad. That’s not to say the CEO can’t delegate or assign responsibility for metrics or areas of performance to other team members. This is often necessary when moving at the pace required for many portfolio companies to grow. However, PE firms never want to see a CEO pointing the finger at a team member if results turn sour. The buck must stop with the CEO. In cases where results aren’t where they need to be, PE firms want a partner ready with a plan of action to redistribute responsibility among the team, take on a specific function themselves until improved, or with a robust new sales campaign, to name a few examples.
A CEO focused on growing equity value
Ultimately, growing equity value is the priority of everyone involved in a private equity partnership. This can be accomplished in several ways, including growth of EBITDA and cash flow generation, but the end goal is the same. A CEO who understands how to calculate equity value, the drivers that influence this value, and who can have a fluid conversation about what’s going on at the company and how that impacts equity value will always be appreciated by a private equity firm. Speaking the same language is essential, and equity value is the foundation of the language PE firms need to speak with their partner companies. CEOs who grasp the concept from the start have an easier time articulating their plans for the company during the transaction phase and are also in a better position to define and implement any adjustments needed for the company to achieve goals throughout the partnership.
For CEOs looking to partner with a private equity firm, it’s important to understand that their leadership skills — not just the company’s numbers — may influence the firm’s transaction decision. Even if a leader doesn’t naturally possess all of these traits, most can be cultivated with time and practice, like many other leadership skills, and will be invaluable when partnering with a private equity firm.
Rob Wolfman is managing partner of Montage Partners.
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