Leadership is the key to delivering growth and outsized returns, whether a business is in PE, private or public ownership.
The due diligence phase of a deal is your opportunity to assess the true risk and potential in an acquisition. Human capital due diligence should be central to that process. If you want to realise returns quicker, it pays to analyse the leadership of a target company with the same rigour you would apply to investigating the nuts and bolts of the business.
How best to go about it? Every deal is different, so there’s no one-size-fits-all method that will give you the insight you need. But there are some simple do’s and don’ts that could help you avoid costly mistakes – and ensure your acquisitions match expectations.
1. Finding excuses to side-line leadership assessment
Some private equity houses worry additional assessments will cause deal-ruining delays. In fact, assessments can easily be fitted in around the traditional due diligence. Others fear an assessment will insult the company owner/s or frighten them off – yet a well-run process should actually impress them and make them want to work with you more.
2. Not maximising what you can learn from the process
Leadership assessment is not a box-ticking exercise. It can highlight red flags that turn you off a deal altogether. Or, it can equip you to take steps from day one to maximize the success of the acquisition. If an assessment suggests gaps in leadership capability, you can begin the hiring process for interim or permanent executives. If concerns are minor, you can plan coaching to be provided by a new chair or external specialists. Looking longer term, you can start on a succession plan to ensure the leadership team will be right for the business further down the line.
3. Relying on your recruitment partner for assessments
Some private equity houses turn instinctively to their head hunter for assessments. A due diligence assessment is very different to a candidate exercise. There is a different dynamic and balance to the relationship – the whole process is far more nuanced. A traditional recruitment style assessment will likely patronise or antagonise the company owner and fail to provide the insight you need.
4. Not using an experienced human capital specialist for leadership assessment
A human capital specialist will run a different kind of process – drawing on objectivity, industry experience and benchmarking data. It may include some personality questionnaires or psychometrics – but they will be of a far less intrusive nature than in recruitment. The interview is where a specialist comes into their own. They will ensure it is a positive, adult-to-adult conversation, not a one-way street that feels like an interrogation.
5. Focussing assessment on the CEO
The CEO is the key person to consider. But, the business should be bigger than them (or you should not be buying it). The whole leadership capability has to be considered.
6. Assessing leadership in isolation without the full picture view
If they intend to remain in place, you need to assess the CEO, CFO and potentially up to three further executives. It’s vital not to asses in isolation. You need to consider the dynamic between these leaders and how that dynamic will work once you are involved. If the plan is to bring in new talent, they should be assessed for their complementary fit with the boardroom.
7. Allowing yourself to be seduced by charisma
Some qualities immediately catch the attention. Presentation skills, presence, charm. Most people associate them with intelligence and business nous. But they can cause us to overestimate a leader’s talents. Be careful not to overweight them in the assessment process. Remember that introverts can be just as successful as extroverts.
8. Not focussing on the qualities that matter
The key determinators for success in c-suite execs are brains, hard work and emotional resilience. Beyond theses, you need a clear idea of what you are should for looking in terms of skills, values, motivations and personality. Are these the right people to grow this business? And will their working style fit the culture of your PE house?
9. Dwelling too much on the past
An impressive past record from a company’s owners/leaders isn’t necessarily a predictor of future success. Entrepreneurial owners face a world of new challenges post-acquisition. Past glories will count for little.
10. Not assessing capability for the future, only for the here and now
You’re looking for leaders who can scale – in the face of changes and disruption in the market. That’s why mental agility and openness to change are so important. You should also be looking for strategic, systems thinking, beyond operational management expertise. A talent for building teams is a must. And, they need the ability to balance urgency (getting results fast) with empathy (taking the workforce on the journey with them).
For advice on human capital at any stage of the PE investment lifecycle, please contact firstname.lastname@example.org or call 0203 854 1608.
¹Alix Partners annual private equity survey