ACTIVELY MANAGING THE POST-ACQUISITION PROCESS
Lessons in change, education, and transition.
In the pre-acquistion article of this three-part series on active managementI discussed the interaction between a general partner and the senior leadership of a company being acquired by a private equity firm.
I outlined the top five areas on which GPs can take the lead to build trust and a thorough understanding of the business they may be acquiring, and some activities that support pre-acquisition due diligence.
I’d now like to discuss what typically happens after a PE firm has made an investment and what I’ve learned as an active CEO in navigating change from a day-to-day perspective.
In my view, post-closing should be an exciting, invigorating time for the GP and the company’s senior leaders. Change usually comes quickly and supports the business objectives, unleashing opportunity for the company.
For the CEO, managing change can be challenging because there is a lot that remains unknown. There is a need to educate a brand-new PE firm, GP, board member or participant to the company on not only the fundamentals, but on all details of the business.
Patience is crucial, as a variety of learnings occur on both sides. Based on my experience, there are three immediate areas that the CEO and senior leadership team must educate on and likely revise after the deal has closed:
1.Financial education and key drivers
Above all else, PE investors need to have faith in the financials. After closing, a number of immediate actions could occur. For example, often a PE firm will place their own CFO in the company or at least alter the current financial reporting package to meet their oversight requirements.
The CEO’s role is to ensure the existing CFO has direct access to the GP representing the PE firm. It’s critical to have seamless contact, communication, and education on the financial workings of the company.
The CFO will likely need to make a number of changes to the reporting to create a comprehensive monthly financial report. If a company has not had this degree of discipline and rigour in reporting, the transition can be challenging.
The CEO must ensure that the CFO acquires a full understanding of the reporting requirements and outlines any gaps in historical reporting information and financial systems. This ensures that the GP sees a plan in place to get the required reporting information.
2. Strategic oversight and education
As an active CEO, I have been placed in a company after closing and asked to confirm many of the strategic due diligence principles and differentiators of the acquired entity. Often there are gaps.
The best strategy is to go back to basics in educating both the PE firm and the management team. One of the very first actions is to conduct a qualitative interview of the company’s top 10 clients.
Talking to the top clients, directly and confidentially, can tell you if the company is on point and delivering the value the PE firm acquired. This exercise can help achieve an understanding of how to bring the management team together, what gaps in the value proposition should be in focus, and what may occur in the coming months from a financial perspective.
Educating the PE firm and their representatives is ongoing. For CEOs, I recommend instigating a weekly call for discussing sales, inventory, pipeline management, staffing issues, and surprises of any kind. Transparency at all times is crucial.
3.Board meetings and governance
Many smaller companies that have added a PE partner have not had a culture of reporting and accountability. Board meetings may or may not be typical but will likely become a requirement for the PE members to plug into the business.
The CEO can help embed reporting and accountability into the culture by getting the senior team to draft and agree on a board meeting schedule that is then given to the new investor. The meeting schedule should include financial reporting, business planning, and annual auditing for the first 12 months.
The CEO will likely need to support senior leaders through the reporting requirements for these meetings. Boards typically like materials written and provided a full week before the meeting takes place. This can be a big adjustment for senior staff not accustomed to providing this level of detail.
The CEO must make sure all senior leadership team members are debriefed on the action items coming out of each meeting. Often a GP will ask for all kinds of information that can tie up senior leadership productivity. These areas need to be discussed with the PE firm and managed accordingly.
The CEO must be sure that clear minutes and action items are captured in the board meetings. The CEO and GP must understand and agree on the expectations and timelines, as it can be frustrating and confusing for the leadership team to address unclear requests for more detail.
The CEO has to be able to say no to the new investor. If the PE firm asks for information that the CEO deems to be unnecessary, the CEO should declare that “X” can be provided but not “Y” and explain why. The GP understands this role and will respect feedback.
As CEO, you need to have a firm handle on the rudder of the ship post-closing.
The CEO should over-communicate with the leadership team and be prepared for plenty of one-on-one conversations and weekly meetings to allow people to come with questions, observations, concerns, and solutions.
At the same time, the CEO should focus on educating the GP on the company’s financials, reporting capability, and strategic plan. These actions will help ensure a successful post-closing period for everyone involved.
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