competing harder for fewer skin in the game job opportunities. On the other hand, when M&A industry headhunters are retained for a CEO search, they can almost cherry pick from their A player database generally available at the time.
Don’t be discouraged by what you’ve read so far. Later in this publication I offer strategies and options on how to make a powerful, effective, due diligence-oriented presentation of your CEO candidacy. If you are willing to put in the necessary effort, you greatly improve your odds of landing interviews for skin in the game job search opportunities.
Based on my twenty-eight years of skin in the game senior executive hiring for mostly lower middle market portfolio companies, the PEG clients generally seek to improve operations, overhaul strategy, thereby increasing their enterprise value for the sale of the company. Lower middle market PE firms I’ve worked with typically have their sights set on acquiring several fragmented competitors and want a CEO who can integrate the acquisitions into the main company. In manufacturing scenarios, PEG ownership seeks to eliminate duplicity of excess equipment and labor as well as reduce any inherited real estate.
PEGs want their CEOs to keep after sales, cash flow and EBITDA, guard against high Capex, and spend three quarters of their time with customers, operations, and strategy. In manufacturing or process companies there are KPIs using a dashboard accessible through the CEO’s smartphone to monitor daily or weekly. Can they insightfully understand a financial statement and balance sheet? Have they worked closely with their past CFOs to understand these critical financial documents?
A CEO candidate’s resume should include:
Metrics
EBITDA percentage growth
Sales increase percentages
Operating income growth
Inventory reduction percentages
Increased market share percentages
New product revenues
Increased top line revenue percentages
Getting hired in a skin in the game senior executive position with a PE-owned portfolio company doesn’t always ensure remaining there until the company exit, especially since there was an above average CEO turnover in the hiring process in 2013. Candidates have to conduct as much due diligence on the PE firm and the potential portfolio company employer as the PEG conducts on the candidate. You have to determine whether the culture of the portfolio company and the PE Managing Partner’s management style represents an ideal fit for your environment over the anticipated job duration.
Boston Consulting Group’s press release of November 13, 2013 stated their research into 198 companies currently under PEG ownership found that 57% have already changed CEOs since being acquired. Some of those changes were planned prior to the acquisitions, but many occurred because the PE owners came to the conclusion that the incumbent CEOs, including recent hires, were not suited to the task at hand. Not all new hires were skin in the game. It’s not automatic that every PEG CEO job interview states that putting skin in the game is a must. At times it’s an option. For the most part, most of my PEG clients are impressed that a qualified and interested CEO candidate wants to put some skin in the game; typically $100K. I’ve had certain CEO candidates for PEG job opportunities earning larger total compensation who have agreed to take less total compensation for the opportunity to buy more equity.
In the lower middle market where portfolio companies are typically in $10M-$100M plus in sales, our PEG clients look mostly for what I call “dirty fingernail” manufacturing, or chemical processing CEOs. Generally, the smaller the company, the larger the equity amount offered, typically up to 10% plus a merit stock option plan. The larger the company, the smaller the equity percentage offered. PEGs seek hands-on leaders with direct or related industry knowledge and experience, including similar markets and major or target customer awareness. Qualified former Division or Subsidiary Leaders, or Business Unit General Managers (GMs) with proven full Profit & Loss (P&L) responsibility and multi-functional direct reports with large corporations are preferable to former full P&L executives from smaller or equal-sized companies as the portfolio company in need of a new CEO.
I have found that senior executive candidates have been judged on merit versus their age. Employed candidates have the inside track over unemployed candidates. However, proven qualifications and solid references matter most overall. Forewarned is forearmed. Is the CEO big picture focused or strictly tactical and short-term focused? A lot depends on what the PE firms seek in a CEO.
A new CEO must:
Have a transparent operating style.
Be able to accept staff accountability and responsibility.
Have no hidden agendas.
Demonstrate focus on mutually agreed upon priorities and routinely track KPIs.
Be detail-oriented.
Delegate and follow up.
Know his future boss’ management style and why the CEO position is open, have a clear understanding of what their value creation will consist of going into the job, and whether he is calling the plays as far as the company board’s strategy, priorities, Capex financing requirements, and timetables.
Know if the former CEO or owner is on the board and whether their CFO has a dual reporting relationship to the PE firm and to the CEO.
Know whether any incumbent executive was an active candidate to become the new CEO and the company’s reason for them not being promoted to the position.
Identify potential mutual points of friction with the PE ownership and determine if he can tolerate them. It’s beneficial here to evaluate this CEO opportunity on a big picture basis. Examples might be learning that there are one or more sacred cows to be inherited among their direct reports and why.
Ask to speak to one or two of the PE firm’s other portfolio company CEOs to get up to speed on the PE firm’s typical management style and whether there are areas of mutual friction.
Do your own due diligence.
Ideally, the CEO prospect should be particularly strong in more than one function. In a lower middle market manufacturing business, the CEO would be strong in operations and quality. If the portfolio company is mainly in distribution, their CEO specs may require he be strong in supply chain management and sales management, which focus mainly on customers’ objectives. The CEO should know how to read and understand a balance sheet and the company financial statement. You may be handed financial statements during an interview with the PE firm. If you fail to react appropriately, your candidacy might disintegrate.
The CEO who lacks certain required functional experience sought after by the PE firm must be prepared to show evidence of being able to hire and retain an A player in that necessary function. This capability is most evident in manufacturing companies where the new CEO may be strong operationally, but lacks sufficient financial and accounting experience such as in budgeting, cost reduction, and planning.
The middle market PE ownership may consist of one or more Operating Partners depending on the number of portfolio companies actively owned. Alternatively, the portfolio company CEO may deal directly with either the PE firm’s Managing Director, a Partner, or Principal.
Most PE firms I
