Knowing before or shortly after you invest in a company whether management can do what you need done and can cope with unexpected change is important, especially in volatile industries. It makes sense to have management assessed with a method that informs you of what the managers can do and how best to work with them for all of you to be successful.
Some investors almost always do rigorous and informative management assessments. But others are very skittish about asking leaders of the companies in which they are investing to be assessed. They say they are worried about losing the deal by asking before it's closed or of straining relationships with management afterwards.
Happily, you can get you what you need – enough knowledge long enough in advance to be maximally useful – without risking the deal.
WHEN TO ASK – AND HOW – IN TYPICAL CASES
Normally, a deal progresses through some kind of formal or informal shopping period, where the target firm or its bankers are talking with several or many prospective investors, and those investors are exploring the facts as shown in the CIM. It's pretty hard to ask management to be assessed at this point, and rarely worth it.
In the next phase, you are the only investor negotiating. You’ve officially signed a deal, both parties have jointly issued a press release announcing the transaction, and you and the seller are working toward closing the transaction. I recommend that in typical situations, the investor ask the target key executives to do an assessment towards the end of Phase Two. The best way to ask is to politely suggest the assessment as part of the normal pre-closing activity for your firm. You can say, “We like to have our portfolio company managers assessed. It’s something we ask for regularly. We know some people seem skittish about it so we don’t insist upon it all the time but we would really like it if you would be willing to do it.”
You can highlight the positives of doing an assessment, emphasizing how it helps both parties work better together. You can say, “Let us get the information that ought to help us to work well together. Management assessments are something we do because it’s good for us, and most people find it’s good for them because they learn a lot about themselves. You learn where you have an opportunity to grow and we learn where we can adjust how we work to fits with your strengths. We both benefit. Would you be willing to do it?”
If managers say “no” you can consider offering some inducements. You can suggest, for example, that you are more comfortable making adjustments in how the Board and company interact when a CEO has been assessed, and that you are more comfortable signing more lucrative or longer employment agreements after a CEO has been assessed because you have more confidence in his capabilities to deal with unknown events. If the response is still “no” you can back off and complete the deal.
If you close without an assessment, then I suggest you do an assessment shortly after the close. You can say, “We are happy with you in the organization but this is a transition and we want to make sure we do everything so that the investment in the company and its CEO works as well as possible, and this process is something that we have found helpful. Here’s what it involves and here’s what you get out of it. It’s helping people find ways to improve where they’re not yet perfect." In a control situation, the CEO is now an employee of a company you own. The CEO’s likely to be hard-pressed to say "no." Of course, a negative response can happen, and then I'd suggest that your Board representation be particularly intense – with the explanation that in the absence of knowledge about how best to manage the relationship – due to the absence of data that the assessment would provide – you need to take the most draconian approach to minimize downside risk.
Your goal in this approach is to do the assessment before problems arise, and ideally, to use the results of the assessment to prevent preventable problems. If problems do arise, relationships will be strained and tensions will be high, making it hard to get cooperation on an assessment.
ANOTHER ROUTE ALTOGETHER
An alternative and/ or supporting approach would be to have your own assessment first, and then say that the process was painless and educational. You can share what you learned, for example, “Here’s what we learned about working with our portfolio company managers. We learned to tell them to ask twice for stuff from us because we’re slow to respond to requests (hypothetical).”
What should I do?
At an appropriate point, try to set up an assessment instead of being afraid of losing the deal. You can gain by establishing a much better way of working with the management team, and avoid the need to start trying to get the information to figure out how to fix a bad situation after it goes bad.
By Leslie Pratch
Leslie S. Pratch is the founder and CEO of Pratch & Company. A clinical psychologist and MBA, she advises private equity investors and management committees and Boards of Directors of public and privately held companies whether the executives being considered to lead companies possess the psychological resources and personality strengths needed to succeed. In her recently published book, Looks Good on Paper? (Columbia University Press, 2014), she shares insights from more than twenty years of executive evaluations and offers an empirically based approach to identify executives who will be effective within organizations—and to flag those who will ultimately very likely fail—by evaluating aspects of personality and character that are hidden beneath the surface.
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