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6 Tips for Transitioning From a

CEOs

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Founding CEO
Corp.
Development
Kit Cooper Signal Partners | November 12, 2018
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Lenders For lower to middle market private equity funds, a key

Private value creation lever can be the successful, collaborative

Equity
transition of a founding CEO. A key part of the investment
thesis in these instances is bringing in a new CEO to build
Member
Success upon prior success and lead the next stage of the
Stories
company’s lifecycle.
Closed Deals
During the courtship phase, financial sponsors and
Resources
founders tend to agree on more rather than less. They
Axial News
often align on a similar worldview, a shared belief in the
business prospects, and an investment thesis on how to
maximize value. This investment thesis often includes a
transition plan that allows for a new CEO to lead the
company in the next phase and by default serve as a
responsible custodian of the founder’s reinvestment
equity.

It’s a great model for many entrepreneurs — get some

cash out, move into a board role, let the PE firm and new
CEO take on the punishing assignment of executing the
next operating plan. After all, the investor’s track
record demonstrates their ability to create value, trigger
wealth-creating events, and this can all happen for
a founder as an active board member versus an always-
on CEO. As they say, “Would you rather be the king or
would you rather be rich?”

Despite the shared understanding between sponsor

and transitioning CEO about the validity of the plan,
doubts will rise and fall in the entrepreneur’s mind. “Will
we actually find someone who cares about the company
and our employees the way I do?” “What happens if we
hire a CEO who says all the right things but can sleep
soundly at night when we have an unsatisfied client?” “Am
I going to miss riding the roller coaster?”

During the process of searching for a new CEO, one of the

most under-appreciated success factors is the
collaboration between the executive search partner and
the transitioning founder.

“Our ability to achieve our desired MOIC [multiple on

invested capital] depends entirely on the CEO replacement
search being a successful project,” says a partner at one
lower middle market private equity firm. “The whole
process is complex and it’s something we’re good at. But it
also depends on a search partner who can calibrate
quickly and empathize deeply with an owner/operator.”
 We talked to several lower middle market private equity
firms about best practices for working on founder/CEO
replacement searches. These were the takeaways from our
discussions:

1. Find the right executive search professional. The search

executive should have real world experience to establish
trust and reinforce further with the founder that a
replacement is in the best interest of their reinvested
equity and the overall success of the company. Having an
external executive search partner who can share his/her
positive experiences on these exact questions can
strengthen the buy-in process before, during, and after
the search process.
2. Prioritize in-person cultural intake.Make sure the search
executive flies out to the locale of the founder/CEO,
wherever that may be. It’s an important step in building
the trust needed for success. And from a project
management perspective, it’s hugely additive to
understanding the culture of the company.
3. Get the guard down. Surround the CEO candidates with
operating advisors and search professionals that can
develop peer-quality relationships with them through
shard experience. This will help with the vetting process.
4. Emphasize quality of relationship between PE and
founder/CEO. Any solid CEO candidate will assign value
to this factor. The search professional and operating
advisors should sell on this point. If the acquisition
happens to be a proprietary deal, that should be
highlighted as it validates existing trust factor and quality
of relationship between investor and management.
5. Find hands-on operators. Focus on candidates that know
how to work with leverage but also be hands-on at same
time. All PE-backed companies in the lower middle and
middle market need this hands-on factor, and this is
particularly true when it comes to establishing a good
relationship between the founder and incoming CEO. For
example, when discussing a tough employee attrition or
process compliance challenge, can the candidate
demonstrate that they knew what was going on a root
cause and solution level?
6. Don’t forget the basics. While you’re looking for an
outside CEO who will mesh well with the founding CEO, at
the end of the day the most critical relationship is
between the new CEO and the private equity investors.
The basics still apply: ability to work under pressure,
reflexively comfortable with change, high sense of
urgency, low ego, adrenaline for hyper growth.

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