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CHAPTER 3

WHAT DO LOWER MIDDLE MARKET PEGS SEEK IN SITG C-LEVEL EXECUTIVE TALENT?

Working for a lower middle market private equity firm as a skin in the game portfolio company CEO is not for everyone. It involves surviving due diligence prior job screening by the PEGs. In these weak economic conditions that are dampening the current job market in many industries, there is keen competition for every skin in the game CEO opportunity. There is a significant increase in PEGs hiring through their M&A network and social media sites because of the glut of good talent available to them. Overall, in the lower middle market, CEOs are competing harder for fewer skin in the game job opportunities. On the other hand, when M&A industry headhunters are retained for a CEO search, they can almost cherry pick from their A player database generally available at the time.

Don’t be discouraged by what you’ve read so far. Later in this publication I offer strategies and options on how to make a powerful, effective, due diligence-oriented presentation of your CEO candidacy. If you are willing to put in the necessary effort, you greatly improve your odds of landing interviews for skin in the game job search opportunities.

Based on my twenty-eight years of skin in the game senior executive hiring for mostly lower middle market portfolio companies, the PEG clients generally seek to improve operations, overhaul strategy, thereby increasing their enterprise value for the sale of the company. Lower middle market PE firms I’ve worked with typically have their sights set on acquiring several fragmented competitors and want a CEO who can integrate the acquisitions into the main company. In manufacturing scenarios, PEG ownership seeks to eliminate duplicity of excess equipment and labor as well as reduce any inherited real estate.

PEGs want their CEOs to keep after sales, cash flow and EBITDA, guard against high Capex, and spend three quarters of their time with customers, operations, and strategy. In manufacturing or process companies there are KPIs using a dashboard accessible through the CEO’s smartphone to monitor daily or weekly. Can they insightfully understand a financial statement and balance sheet? Have they worked closely with their past CFOs to understand these critical financial documents?

A CEO candidate’s resume should include:

 Metrics

 EBITDA percentage growth

 Sales increase percentages

 Operating income growth

 Inventory reduction percentages

 Increased market share percentages

 New product revenues

 Increased top line revenue percentages

Getting hired in a skin in the game senior executive position with a PE-owned portfolio company doesn’t always ensure remaining there until the company exit, especially since there was an above average CEO turnover in the hiring process in 2013. Candidates have to conduct as much due diligence on the PE firm and the potential portfolio company employer as the PEG conducts on the candidate. You have to determine whether the culture of the portfolio company and the PE Managing Partner’s management style represents an ideal fit for your environment over the anticipated job duration.

Boston Consulting Group’s press release of November 13, 2013 stated their research into 198 companies currently under PEG ownership found that 57% have already changed CEOs since being acquired. Some of those changes were planned prior to the acquisitions, but many occurred because the PE owners came to the conclusion that the incumbent CEOs, including recent hires, were 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. From day one, it’s about the CFO building trust with the PE owners, the CEO, the banks, and any Limited Partners who typically are also board members. Building trust with the management team is almost as critical.

The competent and proven CFO is required to have the unquestionable traits of integrity, expertise, skills, and convictions to challenge the portfolio company’s CEO and management team on key strategic and tactical decisions. The private equity environment revolves around the PE Partners craving a unique dashboard highlighting cash flow, margins, and leverage ratios. PE ownership believes that numbers speak louder than words. A CFO should fit the PE firm’s strategic plan profile. Those CFOs heavily experienced in organic growth are better at performance management and containing costs. If the strategic plan is heavily M&A focused, the preference would be for a CFO with significant transactional experience and industry insight. A CFO with heavy turnaround experience or consolidation expertise, who is helping businesses get ready for sale, would not typically be ideal for a company facing a dynamic growth situation.

A CFO needs a balance of technical and leadership skills. Their responsibilities can span strategic planning, analysis, preparation, and presentation of monthly financial reporting including:

 Generally Accepted Accounting Principles (GAAP) financial statements

 Bridges

 Key performance indicators

 Weekly rolling forecasts

 Budgeting

 Credit, collections, and cash management

 Financial and tax audits

 Policy, procedure, and internal controls

 Compliance processes

 Cost accounting (standard and average costing)

 Product costing

 Capital expenditures/depreciation

 Contract review

PE partners are hungry for details and fussy about presentation. The typical CFO mantra is, “No shocks, no surprises.”

The CFO is responsible for compiling the numbers; they better be accurate! Expectations are usually high, demands from constituencies countless, and tight deadlines numerous. The typical CFO must be a “stand up” executive, impartial and passionate, even ruthless when necessary. The CFO reports directly to the PE firm Managing Partner with a dotted line to the company CEO. CFOs are the main conduit of information flow to the PE ownership and the company CEO. He often has to balance completing the priorities of the PE ownership and the company’s management team. This balancing act can be especially difficult if the business is performing in a downward trend.

The PE ownership often puts the CFO on the spot and asks the CFO’s opinion about the portfolio company’s tactical plans to increase the top line and the company’s chance of success. In a middle market portfolio company, it is rare that a controller is promoted to CFO because it would be on the job training. However, M&A expertise is not always required of the CFO since the PE firm typically has that expertise. However, past experience with integrating acquisitions in partnership with operations is valuable. Familiarity is beneficial with IT systems, processes, and controls, particularly Enterprise Resource Planning (ERP) software implementation.

CFOs typically know how the entire day-to-day company works and how the various departments fit together. The CFO is continually involved in operations and is seen as the non-stop furnisher of their financial data requests. He projects a sense of urgency and surrounds himself with passionate “all hands on deck” subordinates. The CFO typically needs a strong experienced team including a solid financial controller to help maintain control over the financial function and enable him to deal with wider issues and requests. Hiring, managing, and retaining solid subordinates is typically a major challenge as the CFO will surely fail without adequate direct reports. The CFO’s leadership approach creates an open, collaborative environment that sparks ideas and results in cross-functional, consensus-driven solutions.

From day one, the hands-on CFO must know the company’s P&L and work on improving cash management, credit/collection, working capital, EBITDA, and profit margins. The CFO drives value creation, guards against unnecessary company spending, and meets debt covenants and all deadlines. He alerts the PE ownership and the CEO to potential problems and will challenge sales forecasts and undocumented assumptions from the various departments and satellites.

The CFO must keep a number of different constituents satisfied which requires timeliness, execution, results, good communication skills, and adequate analytical and consensus building attributes. The CFO must share the company’s financials accurately, transparently, on time, and be willing to clarify what insights his numbers should signify to the PE ownership as well as the company’s management team.

The CFO is the strategic Partner spearheading the portfolio company towards the most attractive exit or liquidity event culminating in the greatest value creation for all the equity stakeholders. If he has any time for reading, the CFO should bone up on How to Win Friends and Influence People by Dale Carnegie. When change management collaboration is important to a company’s transformation and growth, people skills become almost as important as the numbers. Peers must be treated as people rather than just functions. Healthy debate and conflict are part of wrestling with company issues and their solutions. This consideration calls for teamwork, versus the Lone Ranger approach, to reach an action plan consensus going forward, and keeping goals and objectives on track.

Many otherwise highly qualified, interested, and desirable CFOs do not survive their peer and subordinate reference checks, giving feedback such as, “He’s caused too many personality clashes, even in routine dealings.”

The CFO has a major involvement in planning and executing an exit from the PEGs. Typically the exit was four to five years, but nowadays, given the market conditions, the exit is more like six to seven years and counting. I have read that turnover of the PE backed CFO has significantly increased from 2009 to 2013. In my twenty-eight years’ experience, if the CFO is an A player and a good fit with the portfolio company’s PE owners, and after exhaustive due diligence, job screening, and some of his skin in the game, there won’t be any CFO turnover during the typical four to five year employment lifecycle.

The CFO is usually a master in due diligence, but must keep his eyes wide open in entering into his own CFO employment situation. There are issues to flush out before accepting a job offer, even with some skin in the game.

 Can you meet the board? What type of company culture are you feeling and is it giving you culture shock?

 Are there too many CPAs and/or former CFOs in the PE firm overlooking your shoulder with what seems like daily requests?

 Ask to speak with a few CFOs of other PE firm owned portfolio companies to learn their management style

 Is the portfolio company you might be joining highly leveraged?

 Can the portfolio company’s management systems deliver the data needed by all concerned?

 How long does the PE ownership typically maintain its holdings?

 Meet the CEO. Is he the former owner or is he new blood outside the industry? How much skin in the game do the CEO and the rest of management team have?

The above criteria for CFOs of PEG’s portfolio companies in the aggregate is overwhelming, but it is unlikely that any SITG CFO candidate has mastered them all. I am providing a hiring pattern of similar traits and requirements to help SITG CFO candidates with aspects particular to hiring skin in the game CFOs.

What do PEGs seek in their VPs of sales and marketing?

PEGs for their middle market portfolio company typically want a VP Sales and Marketing (S&M) who has been a significant part of one or more successful related portfolio companies owned by private equity and can land on his feet running. He must be a high energy hands-on leader by example who manages subordinates with a focused sense of urgency. The VP S&M champions the fact that in this age of social media, the Sales Department (and the company itself) must beware of the consequences of unsatisfied customers.

The VP S&M must:

 Be marketing savvy and have an acute sales management focus embracing consultative system selling and solution selling.

 Be familiar with the company’s products, industry, and markets.

 Deliver business growth market validation and market entry strategy, as well as valuable analytics on sales force effectiveness and customer response.

 Drive revenue, sales efficiency, Return On Investment (ROI), and close deals.

 Be able to formulate a comprehensive business plan to establish strategic sales direction and if required, define product features needed to satisfy target market requirements.

 Be responsible for competitive analysis, product positioning, pricing strategy, promotional materials, customer service, training, and publications.

 Interface well with operations and finance in a collaborative style.

 Select various appropriate channels of distribution either through independent Sales Reps, Distributor Salespeople, or Employee Salespeople as required.

 Knowledge of various effective sales compensation plans is a must.

 Be budget conscious, setting and achieving aggressive sales forecasts as well as goals and objectives oriented, KPI and metrics driven, and delegate well with strong consistent follow up.

 Be a “no surprises” professional, a motivator, and able to hire, manage and retain a productive loyal superior sales force and a capable marketing assistant.

In certain portfolio companies, new product introduction experience would be vital. Again, PE firms tend to match VP S&M hires industry to industry, markets to markets, products to related products. Desirable background would be fluency in both social media environments and the monitoring and measuring tools for more industry visibility.

In a global PE owned portfolio company, international market development in Europe and Asia will be required, including strategic alliances and periodic overseas travel.

A VP S&M’s expected technical knowledge includes Customer Relationship Management (CRM), such as Salesforce, Goldmine, and Sugar. Also he should have general knowledge of online marketing Search Engine Optimization/ Search Engine Marketing (SEO/SEM), and web analytical tools experience such as the offerings of Adobe Analytics. Travel 30%-40% of the time is often necessary.

It can be very challenging in the confidential interview process for the VP S&M because of his normal work and travel commitments. I have a few suggestions to deal with this interview challenge (see chapter 10, SITG PEG Interviews).

The above criteria for VPs of Sales and Marketing of PEG’s portfolio companies in the aggregate is overwhelming, but it is unlikely that any SITG VP S&M candidate has mastered them all. I am providing a pattern of similar traits and requirements to help SITG VPs of S&M candidates with hiring traits particular to skin in the game VPs of S&M.

What do PEGs seek in their SITG VPs of Operations?

My twenty-eight year skin in the game VP Operations (VP Ops) hiring experience is heavily tilted towards lower middle market diverse manufacturing portfolio companies. There are a number of good points worth noting from this focus. PEGs typically focus on hiring hands-on VP Ops candidates responsible for the production of goods or provider of services. They consistently track KPIs to drive internal and external customer satisfaction and to encourage constructive behavior from the entire workforce. The VP Ops additionally hold subordinates accountable to goals and objectives. These characteristics are key ingredients for all VP Ops.

The VP Ops is the “go to” position to deliver the promised goods and/or expected company services to always satisfy the customers. The VP Ops is typically a take charge leader by example with a sense of urgency and accountability, taking initiative in identifying, analyzing, and solving problems. He needs strong oral and written communications skills to deal with all levels of the business, and must especially express numerics including metrics, percentages, margins, and profit and loss numbers.

The VP Ops oversees the production of company products and/or provision of services. Their role is ensuring that the organization is running comfortably and efficiently according to plan, and that the products and/or services meet client or customer needs.

The VP Ops reports to the CEO and typically manages all company functions except IT, finance, sales and marketing, and is responsible for the Operations Department P&L. Responsibilities are:

 Hands-on management of functional areas of supply chain, manufacturing engineering, quality assurance, production, shipping and receiving, inventory, and facilities

 Reducing the labor content across all products by targeted percentage objective as percentage of sales

 Exceeding operating plan goals in measurements of safety, productivity, quality, and on-time delivery within an ISO9000 2008 workplace

 Integrating product acquisitions, new product/ technology introductions (NPI), lean strategy implementation, production transfers, and facilities/ equipment investment

 Turning around underperforming operations by transforming company operations and culture into a highly effective manufacturing entity

 Incorporating lean manufacturing techniques and continuous improvement to create a sustained favorable cash flow position while increasing production capacity on a global basis

 Showing specific metrics and percentages for having improved EBITDA , improved productivity, improved Direct Labor (DL) costs, improved on-time delivery, improved quality metrics, reduced OSHA recordable incident rate plus submitting a company record of consecutive days without a lost time accident

 A major driver in successful new ERP system implementation and in establishing a land not previously developed (Greenfield) facility for a new product launch

 Overhauling manufacturing flow of materials from receipt to shipment

 Conducting training for knowledge and practical application of lean manufacturing methodologies and world class principles to continually drive improvements in EBITDA, cost, delivery, quality, safety, and employee involvement while placing the customer at the center of everything

 Rearranging a facilities plan to create flow and eliminate waste

 Being grounded in shop floor fundamentals with ability to connect with shop floor personnel in both union and non-union environments

 Having extensive experience in buy and sell side M&A, product line consolidation and rationalization, functional consolidation, and re-engineering of business processes post acquisition

 Possessing personal characteristics which include being a high integrity, trustworthy, hands-on executive leader with credibility amongst customers, employees, board members, suppliers, and other stakeholders that is underscored by an intuitive business focus

 Retaining a reputation for driving positive change that enhances the bottom-line, translates strategy into reality, and implementing best practices across organizations, unifying a winning company culture

 Having expertise in operating budget management, acquisitions and integration, product development and introduction, supply chain, operational excellence, lean Six Sigma, quality, customer service, customer satisfaction, facilities, human resources and environmental, and health and safety

 Providing multi-operational site responsibility for products, including annual operating budgets, three year strategic planning, and being sponsor/champion of process improvement programs utilizing operational excellence and lean Six Sigma disciplines

 Taking responsibility for manufacturing, materials, procurement, manufacturing engineering, quality engineering, customer service, order entry, facilities and environmental, and health and safety

Achieving all the above responsibilities is utopic; it would be considered unusual for anyone to achieve every single responsibility.

The above criteria for VPs of Operations of PEG’s portfolio companies in the aggregate is overwhelming, but it is unlikely that any SITG for VPs of Operations candidate has mastered them all. I am providing a pattern of similar traits and requirements to help SITG for VP of Operations candidates with hiring traits particular to skin in the game for VPs of Operations.

Regardless of the SITG C-Level job you apply for, after you ask for and receive a copy of the PEG’s job specifications, you should complete a self-rating quiz, rating yourself from one to ten against the job requirements. Then write down the name of one or two references who can verify your high ratings. Also include their contact info for the PEG (see the self-rating quiz example in chapter 10).