7 Criteria for CEOs to Diligence a PE-Backed Opportunity


A portfolio company CEO’s fit with a deal is obviously critical.  However, CEO candidates can fail to fully assess their fit with a particular opportunity. Thoughtful, intellectually-honest analysis can benefit both the CEO the sponsor by helping to avoid a derailment down the road.  Stay tuned for more detailed, follow-up posts exploring each for the following criteria more deeply.

Recommended items include:

1. Fit with the private equity firm’s governance approach.  Many sponsors seem similar on the surface.  Further analysis reveals that all private equity firms are very different – particularly in how they engage with, and govern, the CEO.   CEOs must understand if the sponsor in question is more-or-less operational and hands-on, or, more-or-less a strategic investment partner.  A majority of firms sit in the former camp which means many CEOs will have company in running the business.  This involvement can be in the form of welcome support or burdensome control.  Be certain your style is a fit with the sponsor’s approach.

2. Stage of the investment in the hold period.  Although hold periods can last as long as 10 years, private equity firms would prefer to transact in 4-5 years, or less.  This relatively shorter timeline fuels a stronger IRR metric at exit.  Portfolio company CEO roles are always high pressure, but the pressure increases as the hold period matures.

3. Most pressing strategic challenges AND how they line with your capabilities.  CEOs should keep their ambition in check and insure their core competencies fit well with the objectives of the business.  A CEO’s ability to execute quickly will determine her/his success or failure.  Many candidates are over-confident and/or underestimate the gravity of the challenge.  Intellectual honesty is critical when evaluating a CEO role.

4. Purchase multiple.  If a CEO is joining a healthy, growing company then the sponsor most likely paid a full price for the asset.  They may have even knowingly overpaid given the competitive deal dynamics and pressure to deploy capital.  As a result, CEOs are expected to accelerate that company’s growth rate in order to yield a discounted purchase multiple (on a backward looking basis).  Going forward, there is risk of some level of multiple contraction as interest rates are expected to rise.

5. Viability of the investment thesis at current state.  CEO candidates would be wise to create their own value-creation models and share them with the sponsor.  Alignment of “what success looks like” is critical before a CEO and sponsor sign on the dotted line

6. Reason for the CEO search.  A CEO search for a private equity-backed company usually means one of two things: a.) succession planning for a founder replacement; or b.) unplanned replacement of an ineffective CEO (founder or otherwise).  Each scenario has unique challenges and candidates should think carefully about the genesis of the CEO search to understand the undercurrents at play in a given private equity portfolio company.

7. Estimated cash proceeds at exit.  Many CEO candidates focus on the option grant percentage.  While this number has meaning, it is secondary to the estimated cash proceeds at exit.  Candidates should focus on the amount and viability of wealth creation and not the percentage of ownership.  It’s better to get 2.5% of a winning deal than 4% of a dog.  For later -stage hold periods, synthetic equity packages (such as a sale bonus) may be employed by the sponsor.


Rob is a recognized expert on the topic of private equity CEO performance.  He is Founder & Principal of PrivateEquityCEO.com.  He is also Managing Partner of Integis which is the nation’s leading search firm focused exclusively on the private equity-backed, middle market.

Reach Rob here.

Execution, Leadership, Track Record

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: