Private Equity – When to Assess a Management Team?

By: Steven Gilbert

Private equity professionals understand the utility of assessing a management team. However, in the words of an operating partner I spoke to recently, “The spirit is willing, but the flesh is weak!”

The main hesitation is timing. Competitive bid situations make access to management difficult, and assessment risks can be seen as a negative, particularly if not used by other potential suitors. Post close, the courting of management makes the transition to “now we’re going to assess you” feel abrupt—in fact, it can sabotage the goodwill built up. And a management assessment during the first 100 days of ownership can be a distraction when other business priorities are pressing. These conflicts create tension because understanding the management team capability early is critical to future planning and value creation.

Start by looking in the mirror

If using assessment experts is just not possible, then ensure you are sharpening your assessment skills internally. What are the critical questions you must ask to understand the capabilities of the management team? How do you frame questions and then follow up on answers to get at the gritty aspects of what is important? And, as a deal team, how do you challenge the insights you have gathered to ensure that the desire for the deal is not blinding you to reality? Assessment experts may not be able to be front and center with you on the deal, but they can guide your interviews and be a catalyst for better decision making as your deal team behind the scenes.

Presentation is everything

Assessing the management team soon after the deal is signed has obvious benefits, albeit with some potential downsides as mentioned above. It enables understanding of true management capability and readiness to scale the business. More importantly, it helps the CEO and board understand what gaps need to be bridged and how to compensate for weaknesses at the top. One outcome might be that some leadership changes are necessary based on the investment thesis, so some apprehension is understandable. In the long run, however, you must always remember that a little tension is preferable to an underperforming asset. True leaders who work on the offensive with the capability and self-confidence to lead a business forward relish the idea of assessment. They view it as shorthand for “how can I get better.” Assessment does not have to be an interrogation that creates an unhealthy dynamic; it is a tool that generates alignment on leadership requirements, informs future business planning, and strengthens management teams. People actually prefer to know where they stand, where they risk coming up short, and what to do about it. Managed with care, transparency, and attention to detail, an assessment process can strengthen the relationship between the board, CEO, and top team.

Choose a process that adds broad stakeholder value

If the only people reading assessment reports are the board and CEO, then value is minimized. Management team assessment needs to be experienced as a process that generates insight and value for everyone directly involved. A critical outcome is a robust feedback process for each individual that provides recommendations for more impactful leadership. Development plans must be tied to the investment thesis and owned by the CEO. In addition, fully leveraging state-of-the-art assessment tools allows for the roll-up of insights to the team level. Understanding collective strengths, gaps, and potential provides a roadmap for strengthening team performance to drive growth.

Key Points

  • Timing of management assessment is complicated—agreed.
  • The short-term risks of conducting an objective management assessment do not outweigh the long-term risks of backing the wrong players.
  • Changes can be made at a later date, but that approach is generally more disruptive than getting a solid foundation in place early.
  • There are ways to increase the deal team’s capacity to make more informed choices.
  • Transparent presentation of assessment is critical to engagement in the process.
  • Assessment needs to add value to all participants, rather than function as an information-gathering tool for the board and CEO.

 

Steven Gilbert (sgilbert@rhrinternational.com) is Partner and Global Private Equity Lead at RHR International

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