Skin in the Game. Jim Gilreath
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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 have represented usually want the CEO to land on their feet running and have them prioritize operational matters. The new CEO must get thoroughly up to speed on the direct reports and learn if they also have any skin in the game. Inheriting a strong staff is very fortunate, but keeping them in the company is a CEO’s imperative. I have found staff equity ownership helps them remain on board. I have been a witness to many lucrative liquidity events at the company’s exit by our hired senior executives.
One interview question that frequently arises is: what would the new CEO do in his first month on the job? A new CEO’s early priority is visiting the company’s most important customers with the VP Sales and Marketing. The new CEO should also schedule visits to all the company’s plants or facilities as soon as possible with the VP Ops or Chief Operating Officer (COO).
Skin in the game CEO prospects should realistically evaluate themselves in terms of whether they can do the job well and what perceived shortcomings they might have versus the PE firm’s specifications. Most hiring authorities (in my over forty years of headhunting experience) are unduly influenced by grading the CEO candidate compared to the job specs. Proven CEO prospects lacking an MBA often are thrown out with the bath water. Be prepared to contend with this issue and overcome it effectively by discussing your advance educational credits, specialized training certificates, and your expertise. If you firmly believe it, state that you feel you can land on your feet running in the CEO job and bullet point why you feel that way.
Stress your proven track record and value with specific facts and be prepared to furnish a supportive reference name or two. Some qualification deficiencies are almost sure knockouts, such as the company having plants in Asia and the CEO prospect having no Asian operation management track record. Not every CEO candidate has global management experience, however.
Similarly, it is desirable if a CEO has multi-location facilities management experience, especially if there are integration possibilities. The SITG CEO and all skin in the game senior executive candidates who encounter job openings at PE firm portfolio companies should email their resume to the firm if they feel qualified to pursue any verbally described open CEO position. Next, request a copy of the CEO requirements or other senior functional titled job specs as soon as possible. Then break the job requirements into “must haves” versus “preferred items”. List the must have requirements and rate your own qualifications between one and ten.
If you survive your initial job interview and mutually remain a candidate, sign a non-disclosure agreement (NDA) and request a copy of the company’s offering memorandum, usually written by the investment banker of the company’s former owner. It details the company’s financial track record, describes the business, and identifies their customers/clients. This memorandum is vital to your overall due diligence effort and is what the PE firm used as part of their due diligence effort before acquiring the company.
The above criteria for CEOs of PEG’s portfolio companies in the aggregate are overwhelming, but it is unlikely that any SITG CEO candidate has mastered them all. I am providing a pattern of similar traits and requirements to help candidates with hiring aspects particular to SITG CEOs.
What do PEGs seek in their portfolio company CFOs?
What attracts CFOs to PE owned middle market portfolio companies? Why are they willing to invest $60K to $100K and sometimes more of their own money in the equity of their next employer? Simple answer: risk and reward. What is the typical CFO position like? Exhilarating and exhausting.
The newly hired skin in the game PE backed portfolio company CFO must get up to speed with the private equity agenda and quickly get a good handle on the complexities of the company’s debt agreements.