There is no more pivotal or emotional management change than transitioning a founder-owner CEO. They are by definition, the heartbeat of a business, central to its culture, success and identity. At the time that external investment comes from Private Equity the question always arises: “how long do we back them for?”
There is undoubtedly a conflict at the point of deal between winning a founder over and being truthful about how the new investor sees the management team evolving. Turkeys tend not to vote for Christmas – even in the current political climate – so assuming the owner is not cashing out at the point of investment, reassuring noises are often made towards management, even if behind the scenes there are misgivings.
The usual cause for concern among investors is that the Founder-Owner is too entrepreneurial (read, hard to manage and not accustomed to challenge), too one-dimensional (strong on sales, technology / product development, operations but only one of the three) or too small company (has reached the point where their capability is commensurate with that of the business). In all cases they have a disproportionately high influence on the businesses versus those leaders brought in externally. The business evolves around them.
Having worked on numerous and very different founder replacements, succession planning is always the best option and one that PE does not always do well. The balance between involving the incumbent in the process and allowing them to direct the types of profile, personality and eventually even choose their successor is hard to get right. The founder should be involved but only have an equal voice in decision making among stakeholders.
We have learned that direct sector experience is only relevant in the most technical of industries and the net should be cast wide. It can be a common misconception (perhaps in an attempt to de-risk the hire) that the search is kept within sector. It is much more important to bring in someone with rounded leadership skills, strong emotional intelligence and capabilities in the key areas for the business over the longer term (building a sales engine, internationalisation, operational expertise) than someone who is “well known in the industry” or brings a black book, as this inevitably expires.
For best results, change among the broader management team should be staggered rather than wholesale (though in turnaround situations a brand new team with a great deal of impact can be successful). The business becomes accustomed to change and will learn that, done right, it is nothing to fear and this will help keep churn rate down.
It may now be that more structure at the point of deal should be put in place. Timings can often be vague (“the CEO will transition out in 12-36 months”) and lead to a lack of direction and stagnation. In the same way that earn-outs are mechanical, it may be that milestones are put in place to ensure that change is structured and ensures it is delivered. This forces investors to be honest with founders on how they envisage transition and whilst it will not win them every deal, it is better for both parties that they align themselves with the right partner, rather than there being the need for forced rather than voluntary change which is the most damaging possible outcome for the business and investor.
Good management assessment and due diligence can help bring data to intuitive feelings about the team investors are backing and lead to conversations about assessment more rooted in logic rather than instinct. It may be that investors need to let deals pass by if they do not have the right management team in place now and have not built the relationship with the founder during the process to agree on a shared strategy. If they can, however, the process to find a successor can be a hugely positive one. Time becomes a luxury, candidates are more attracted as they are joining a forward-thinking, aligned business rather than coming to repair the inevitable damage caused by a difficult parting of ways: a demotivated or fragmented team, a lack of focus on the core business and typically performance issues as a result.
Good succession planning for founders is not easy and takes time, but businesses and investors benefit from it.