What are the issues that can prevent a new owner from meshing with the incumbent leadership team? Jos Opdeweegh explains why, when, and where things tend to go awry.

1. Jozef J. Opdeweegh
7 REASONS WHY PRIVATE EQUITY ACQUIRERS FAIL TO MESH WITH
INCUMBENT LEADERSHIP TEAMS

2.  When a private equity fund sells a
successful company, the company’s
leadership team would seem to be a
valuable asset for the new owner. After all,
the team built shareholder wealth and it has
intimate knowledge of the business. But in
many cases, the executive leadership team
does not survive the change in ownership,
even if its performance was stellar.
According to longtime CEO Jozef ”Jos”
Opdeweegh ”Unless the ownership
transition is undertaken with great care, it
can undermine the continued success of the
company and its value.”

3.  Opdeweegh, a veteran of four private-equity company transitions, notes
that when a private equity fund initially invests in a company, it is
common for the purchase to be based on an investment thesis. ”Such a
thesis may be based on premises like turn-around, M&A, organic growth,
SG&A reduction, balance sheet optimization or a combination of these
elements. The company leadership team executes to that thesis to build
shareholder wealth. When the end of the investment horizon approaches,
a private equity fund will sell the business to the highest bidder.”

So, what are the issues that can prevent a new owner from meshing with
the incumbent leadership team? Below, Opdeweegh explains why, when,
and where things tend to go awry.

4. 1. The inability of
the leadership
team to
participate in
choosing the
new owner
 In an auction, which is the
typical process used to sell a
company to the highest bidder,
the executive team is not
typically invited to weigh in on
the selection of the new owners.
According to Opdeweegh, ”This
can lead to a dissonant
outcome. Oftentimes, a clash of
strategic views and corporate
cultures occurs.”

5. 2. The new
owner’s failure
to recognize the
importance of
the
management
team
 ”Some private equity owners view a
management team as an end to a
means, rather than as a valuable and
continuing asset,” cautions
Opdeweegh. ”In determining their
future strategy, they quite often they
will trust the judgment of a less
qualified consultant over that of a
seasoned management team with a
proven track record.” Additionally,
notes Opdeweegh, ”Private equity fund
leadership often fails to appreciate
how challenging it will be to achieve
the post-purchase target return, and
consequently, they fail to recognize the
importance of the management team.”

6. 3. An
unbalanced
payout to the
owner
compared to
the
management
team.
 Opdeweegh says, ”There is an
institutionalized lack of balance
in the economics of private
equity deals. It is not uncommon
to have deals in which an
individual private equity partner
earns a larger payout than the
entire management group.” He
goes on to explain that the
inequity in compensation
illustrates an apparent lack of
appreciation for the complex
and demanding work of
management teams.

7. 4. A clash of
corporate
cultures
 ”It is not atypical,” says Opdeweegh,
”for a clash of cultures to arise
between a new shareholder group and
an existing executive team.” The
acquired executive team typically has
worked together for an extensive
period and has developed a shared set
of core values. This set of values, which
constitutes the corporate culture, may
be very different from the behaviors
the new owners wish to instill into their
company vision. Says Opdeweegh, ”If
values such as fairness, openness,
inclusiveness, the speed of decision-
making and respect are not aligned,
cultural and business issues will
surface.”

8. 5. Preconceived
notions and
impulsive
decision-
making by new
owners
 Opdeweegh says that new owners
often jump to conclusions when
assessing the talent in their acquired
business. For instance, during
management presentations, they might
conclude the CFO is lackluster or the
COO is nontraditional. ”A rush to
judgment is not only unfair to
management,” he warns, ”it can lead to
a crisis for the new owners because a
forced executive replacement usually
triggers an executive team exodus.
Such a migration will significantly
impact the business with the loss of
much institutional knowledge.”
Opdeweegh adds that hasty
management churn can easily result in
a three to four-year setback in revenue,
EBITDA trajectory, and performance.

9. 6.
Disagreement
over the new
strategic plan
 Speaking from his experience in the
business, Opdeweegh explains how a
new owner will develop a strategic plan
to form the foundation of their
investment decision. ”This strategic plan
is based on assumptions relating to
organic growth rate, diversification
across geographies, customer and
industry verticals, M&A activity, balance
sheet structure, cost of the back-office
functions, and other relevant aspects of
value creation. The incumbent executive
team may view some important aspects
of the plan as unattainable or
undesirable for shareholders’ wealth
creation.” Disagreement about the
strategic direction of the company and
the key underlying initiatives is another
classic reason for a failed relationship
between the acquirer and the acquired
executive team.

10. 7. Second
guessing of
management
team decisions
by the new
owner
 Even if the new owner and the incumbent
management team agree on the strategic
plan, the new owner can undermine success
by continually second-guessing management
decisions. Says Opdeweegh, ”Private equity
funds recruit from a pool of the best and
brightest professionals, but these individuals
have spent their careers building experience in
the grueling PE environment and therefore
tend to lack concrete corporate leadership
experience. Undoubtedly with the best of
intentions, these hardened professionals will
have an opinion about many facets of the
day-to-day, tactical and strategic management
of their portfolio companies.” Adds
Opdeweegh, ”Consequently, the management
team spends an inordinate amount of time
communicating or justifying the rationale of
certain decisions to the shareholders. The
resulting drag on time and morale can cripple
efforts to reach target returns.”

11. About Jozef:
 Jozef Opdeweegh, also known as
Jos, has served as CEO for over 17
years of global technology,
distribution, and supply chain
optimization companies with 5,000
to 20,000 employees, public or
privately held. Opdeweegh has
extensive board membership
experience on 4 continents with
related and unrelated companies.