How to survive and thrive with private equity investors

Private equity investment opens up exciting new opportunities, but also some unique challenges for a management team. As an experienced Private Equity firm operating partner, Michael Eidenschink has helped many senior leaders navigate the often tricky relationship with PE. Here he offers his advice on making that relationship more productive for everyone involved. 

1. Your preference for a buyer doesn’t matter. Or does it?

If you have several suitors, your shareholders will rightly want the best financial deal. If you have a preferred partner – one with a deal team you’re comfortable with and which will better support the business – there are ways to influence the decision. For example, you might provide more access to a particular deal team and work more closely with them early on, finding ways to add value or de-risking the investment together. This can give your preferred buyer more confidence to increase the price and potentially seal the deal.

2. Get to know the investment case and 100-day plan early. 

Eventually you will have to commit to the fund’s investment case, so the earlier you understand what’s in there and what isn’t, the better it is for your long-term survivability. Often it is based on fundamental things like market growth, synergies and cost reductions, but you need to make sure you’re on board. The fund’s investment case is the basis for the price and budgets, and it is what the deal team – and you – will be held accountable for by the investment committee. The more modest the plan, the better for you. If you don’t get involved early you could end up with budgets you can’t deliver – and then you’re in trouble. The deal team will want your involvement so they can feel confident in you. This could also be an opportunity to increase the sale price if you feel they’ve been too conservative with their goals. Like with the investment case, you need to own the 100-day plan. There is a lot of opportunity to shape it and make investments early on that will help you through the deal cycle. Ideally get involved pre signing. 

The beginning of a deal is a great time to properly review your team and make hard choices.

3. Now’s the chance to fix your team. 

Management teams are often very loyal to their senior team. But the reality is, they may not be the best people to take you forward – and that can come back to bite you. I worked with one CEO who held onto his head of HR even though they weren’t up to the job. Bad choices were made creating organisational structures and hiring, others were pushed out and that meant it wasn’t long before the whole business was underperforming. As a CEO your team’s performance reflects on you and your judgement. The beginning of a deal is a great time to properly review your team and make hard choices. You need to understand your own strengths and weaknesses and get the best possible team around you. But recognise that your view can be tainted, so an independent opinion is a must – PE will often provide resources, such as organisational effectiveness consultants who can help.   

4. The deal team will back you, but only up to a point. 

The PE investment committee will ask their deal team: do you trust the company’s current management team to deliver? And they’ll say yes, otherwise they won’t buy the company. At that point, the deal team is locked into a certain level of commitment to you – but only up to a point. This means you’ll be allowed some missteps, but if things go too far off course, at some point the deal team won’t be able to protect you. You need to be open with them from the start and show them the good, the bad and the ugly, because it will all come out eventually anyway. I know at least one fund where no matter how good a leader was, if they weren’t transparent they were gone. It can even be a good thing to identify issues early, because it means you can make an improvement and, by getting the PE team involved, you are sharing accountability. This might even give you leeway to take more calculated risks – which can help to improve value creation. 

5. Understand how the PE fund operates. 

There will be a senior deal lead who’ll meet with the CEO weekly, a very senior person who you’ll hardly ever see and then a bunch of juniors. They’ll be the ones taking up a lot of your bandwidth. And although they might be young, smart and ambitious, they’ll likely have no experience of running a company. You’ll have to work with them and make them feel valued. It can be difficult to manage. Make sure you work closely and openly with the deal lead, also a good operating partner can help with this. 

6. Manage EBITDA and don’t overcommit. 

You’ll have to deliver a steady EBITDA increase over the life of the fund. But often management can find themselves in a situation where they overcommit on timing, sales and costs in the belief that’s what’s needed to make an investment. An operating partner can protect you by balancing the deal team’s expectations with what’s realistically achievable. It’s also worth remembering that although EBITDA is what you’ll be judged on, there are clever ways it can be “influenced” on the margin. 

7. Operating partners can be your best friend. 

There are a wide range of experienced resources at your disposal, from the previously mentioned external consultants through resources at the fund. Get to know those early and understand how they can help you. Often the fund will have operating partners to support the business. There are many flavours of operating partners – if they are senior enough and have the right background (and personality) they can be incredibly valuable. Build a good relationship with them, as they combine corporate experience with the trust of the deal team, and they’re there to help you. Navigating a PE buyout can be hazardous for senior leaders and a strong operating partner can be your best friend.