Since I have had the opportunity over the last six months to work with a couple of companies who are of significant enough size (both revenue and EBITDA) to be considered a portfolio or platform company, I thought it would be worthwhile to talk about what a PE firm looks for specifically in the CEO (if he/she remains) and the management team that will remain in place after the sale. If you need a refresher on what is required to become a platform or portfolio company, be sure to read my post here.
Needless to say, the strength of the existing CEO and management team is of extreme importance, because they are not only banking on your company. They are also banking on the fact that you are able to attract other acquisitions and impress additional equity or debt investors, in addition to continuing to run the company. The analogy I so often use is: the CEO not only needs to drive the bus that has all the people in the right seats when they receive their equity investment, but they now need to drive the bus up a very steep hill (at a very fast speed), adding passengers along the way with barely a stop.
A CEO can only do that if they are confident themselves (more on this shortly) and also have a very competent management team who can support them as they make additional acquisitions. Here is what this looks like:
The Supporting Management Team
Let’s start with a COO. This person absolutely must keep all the wheels on the bus in good shape, balanced, and lubricated. The CEO doesn’t have time for this, so I usually view this person as the 2IC or second-in-command. Other than weekly management meetings, the CEO’s calendar is full looking for additional acquisitions, so the COO really needs to step in and run the organization if they aren’t already. Not having a person in this role really makes the CEO’s job harder as he/she will get pulled more into the day-to-day activities.
Next, you will need a very strong CFO. This person is no longer in the trenches of the day-to-day accounting, but instead only handles the high-level financial aspects of the existing company. The rest of their time is involved with helping the CEO look at prospective acquisitions and running EBITDA and forecasting analysis on all prospective buyers. They are usually the first person who really examines the initial financial data of a prospective seller. Once an LOI is signed, they can step back and hand it over to the outside accounting firm who is preparing the Quality of Earnings Report for that prospective target. But up to that point, they need to run the analysis on the deal to make sure it will add value in the end to the portfolio company. This goes beyond what a controller does, so you may need to upgrade this position if you don’t have that level of skillset in the organization.
Since you can never take your eye off of sales, a CRO or very strong Director of Sales is needed. They not only make sure projections of the portfolio company are met, but can then also step in upon the purchase of a tuck-in or add-on to help integrate products and customers.
And in my opinion, no organization is complete without a very strong CMO. Theyneed to incorporate the products and services of the new acquisitions into the fold of the current products or services. They may also need to realign or rebrand new acquisitions, which must be done carefully and with sensitivity so as to not confuse the existing customers with new branding.
The type of organization or whether they have their own IP may dictate a CIO or CTO to make sure the products/services being acquired can be migrated or integrated into the existing platform or infrastructure. This also includes integrating accounting, human resources/payroll, ticketing, marketing automation, and sales or CRM platforms.
Now, will this kill a potential platform or portfolio opportunity if you don’t have all they key players in the right seats on the bus? No, probably not. But plan on it being a priority of the PE firm to get those one or two vacant seats filled immediately, assuming you already have a strong CEO at the helm who will remain post-acquisition. If the existing CEO is planning on leaving, and all those seats are not filled currently, it’s probably a no-go. Let me say that again: a CEO who is leaving must have a solid management team in place who can step in, or most PE firms will pass on the potential deal. PE firms know that bringing in an outside CEO can be a very risky move if the “right” person is not picked, which usually means they already have a “known” individual by one of the partners of the PE firm to step in and assume the responsibilities.
Attributes of the CEO
Let’s now turn our attention to the characteristics needed in the CEO that remains or the person who will replace the existing CEO.
First, they must be direct and focused with a high sense of urgency on the task at hand: growing the existing portfolio company organically and through additional acquisitions. No shiny object syndrome is allowed here! He or she must be able to articulate the new goals and objectives to the team and, equally important, the timeframe in which they need to be accomplished. This may mean their new role changes dramatically post-acquisition. Some CEOs, even those who have been incredibly successful, need to let go of areas they have wanted to keep under their thumb – typically forecasting, projections, and the overall focus on financials. The PE firm will want their CEOs to block out that noise, focus on a limited number of very specific initiatives, and not waste any time in areas that can and should be handled by other members of the management team.
Second, they must be articulate and be able to convincingly share the current unique value proposition of the company, as well as future objectives and plans, with factual data that can be easily understood and supported…all while not getting their prospective investors lost in the weeds of details. Staying high level but not so high that the vision is unbelievable.
And finally, PE firms are looking for someone who understands how to grow equity value. Even before their own acquisition as a platform is finalized, they should have a list of potential acquisition candidates to immediately start wooing. And to truly understand equity value, that means that person should understand how everything ties together, like gross profit margin, EBITDA, YOY growth metrics, and customer retention and acquisition costs. In addition, they need to continue bringing in acquisitions that maintain the culture of the organization while introducing new players in management roles who were formerly CEOs of their own companies, all while keeping egos in place. Honestly, this could be the toughest part of being a platform CEO.
On top of all of that, the CEO needs to maintain their leadership qualities (which, ideally, they already possesses), such as: integrity, transparency, accountability, and the respect of their people.
Believe me when I say: just because you have the numbers (both top line revenue and EBITDA) to be viewed as a platform company, doesn’t mean you will automatically be able to assume the role of the CEO. Even before the deal is completed, your skills will be tested along the way. During the due diligence process, you will be asked to prepare multiple sets of projections (both upside and downside) and be asked to present your company to prospective debt partners (if one has not yet been chosen for this transaction by the PE firm or independent sponsor). And if the PE firm deems that you don’t have what is needed to carry the organization forward, you will be replaced.
However, there is a positive in all this. If your goal is to become a platform company, but you don’t remain as the CEO, you maintain the equity that you contributed to the buyer. With the right PE firm as your advisor, and a solid management team that you leave behind, that equity can grow into a healthy sum of money down the road with a future sale or recapitalization.
Want to learn more about what it takes to be a platform company and what the rewards are down the road? You might be interested in our upcoming course, Ready…Set…SELL (Your Company) – check out our waitlist.
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