V.III Role of Management – Selection Heuristics
A number of interesting themes emerge from the data regarding the role of management. The practitioner’s view is that the quality of the management team is a fundamental issue in a proposed transaction. This perception is reinforced by academic research that indicates “Findings at both individual and aggregate levels indicate that the most important criteria associated with likelihood of investment are target firm profitability, industry growth and presence of professional managers (Dawson; 2006, p.7).
The PEGs show flexibility regarding the quality of the management team. There is a continuum from those who see the existing management team as being very important to others who are far less concerned. A managing partner noted: “the businesses must have good
management in place.”(6) A senior vice president stated:
Equally important to us is that a company has a very solid management team on the inside of the company, somebody besides the primary business owners, who have been with that company for some period of time, where you can tell they have really been a contributor to the success of the business. (9)
The depth of the management team was relevant to several PEGs: “the more in-depth the team, the better.”(4) The relationship between the management team and the PEG is also important: “we are very much focused, not only on the quality of the management team but also the chemistry between our group and management.”(17) A partner commented: “Building a partnership is where you create value and that’s the tough part and how we earn a return.” (14) Another commented: “The real struggle, to be honest with you, in all this stuff, is just whether the ownership culture is willing to embrace change.” (3)
Other PEGs expressed less concern with the existing management: “we don’t have to have a deep management team. We just need a competent management team.”(5) As a fund founder noted: “we are loathe to enter into a transaction and just rely on past management to take us to the promised land. We don’t do that, because we have learned our lesson that if they
haven’t done it before, they are not going to do it on our money.”(3)
Most PEGs do not expect any business that is acquired to have a perfect management team. This group generally needs to be supplemented and upgraded. A business development officer mentioned that they look “to supplement and plug in gaps in management, so we don’t expect any business that we acquire to have a perfect management team that doesn’t need any supplementing.”(11) In fact; “We will buy a business knowing full well that we need to change
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out the management team…if you look back at every investment that we’ve ever made, we’ve had multiple changes in senior management.”(11) One partner stated that “in every deal that we have done in 10 years, there’s always been an addition to the management team.”(14)
Other comments included “we don’t get involved in a deal unless we augment the senior management team.”(3) Clearly, if the teams are not strong, the PEGs will replace them. The usual function that is most focused on is finance as the incumbent typically will not have the qualifications and skills to handle the role. The PEGs will put in new CFOs to upgrade the position, in particular, in terms of reporting. Additionally, the PEGs anticipate the need to invest in information systems and putting professional processes in place.
The data indicates that the importance of retaining the existing management team varies from firm to firm. “Management is not the most important issue although they need some continuity. One person, not necessarily the CEO or CFO, needs to stay.”(12) The point about knowing who was going to lead after the transaction closed was reinforced by other decision- makers. A vice president noted the following preference: “a number of key senior management team members that have been around for a while and that would stay and participate during our ownership.”(11) Most PEGs really desire an understanding of who is going to lead the company forward. It can be the founder, an heir, someone in the organization already, or someone that needs to be recruited.
The PEGs do expect the management team to have a major equity position in the business: “management owns what we don’t. We will subsidize management’s buy-in on the front end.”(13) This position can range from as little as 5% with the majority looking at a range of management ownership of 20-40%. In the case of family-owned businesses, the role of the
family going forward is important as well: “if there is not equity rollover with the family, there is no deal.”(20)
This issue of management owning equity in the business may vary from the expectations of the founder. Many family businesses have not extended equity participation beyond the founder and his family. Giving senior managers an equity position may be a difficult decision, particularly sharing financial and strategic information may prove to be an issue to many family businesses.
The findings suggest:
Proposition 2: Private Equity Groups utilize procedural heuristics that guide decisions