Building the Dream Team for a Corporate Carve-out
Lion Equity highlights the transformative power of a well-built management team in corporate carve-outs
In today’s rapidly evolving M&A market, carve-outs have become a strategic opportunity for both private equity buyers and corporations looking to sell. With excess dry powder on one side and rising costs of capital on the other, carve-outs are likely to continue making headlines as a way to achieve both parties’ objectives.
However, carve-outs are hardly the easiest deals to execute. Imagine a scenario where a large conglomerate decides to divest a small and sleepy division. That division must suddenly stand on its own two feet. The strategy is new and aggressive, cash is tight, the pace of change is fast and mistakes are costly. This is the exact scenario where the right management team can make or break the success of the carve-out.
At Lion Equity, we’ve seen firsthand the transformative power of a well-built management team in corporate carve-outs but have also found that building the right team requires a well-executed hiring process.
The Talent Mismatch Challenge
Inheriting a full management team in a carve-out is unlikely. Even if you do, it can be challenging for everyone to adapt to new owners and expectations. The post-close environment is usually starkly different from the parent company, demanding different skills for success. At the same time, ownership must be strategic with any management additions or changes to avoid early onset change-fatigue or the loss of valuable institutional knowledge. This calls for a thoughtful and targeted approach to building the management team.
At Lion Equity, we specialize in corporate carve-outs and have deep experience building great teams that can guide our new portfolio companies through the fast-paced changes those carve-outs entail. To do this, we follow a three-step approach, starting in diligence, to quickly scope and build effective management teams: Define the strategy, lead the selection and accelerate the transition.
Define the Strategy
Our experience shows the best management teams are fit-for-purpose. While a great general athlete may perform well, executives with skills and experiences tailored to the specific needs of the new standalone business will significantly outperform. Here’s how we identify those specific needs:
While a great general athlete may perform well, executives with skills and experiences tailored to the specific needs of the new standalone business will significantly outperform.
Build out the operating strategy: Work with the acquisition team and management to form a hypothesis on the post-close corporate strategy and define what success will look like.
Scope the transformation: Identify major initiatives and investments required to execute the strategy, as well as the risks involved in that transformation.
Identify required skills: Determine the capabilities and expertise needed across functional and core strategy areas to deliver on these initiatives. This gives you a clear picture of the specific needs of the carve-out.
Assess existing team gaps: Evaluate the existing organization design and management team to identify gaps between what you need and what you have today. Use this “gap analysis” as a guide for determining which roles need to be added, which roles should be rescoped or which roles require talent changes.
At Lion, this pre-close work allows us to identify potential talent changes in a targeted way. It gives us a North Star as we look to select the right people for the team.
Lead the Selection
The management selection process is a critical step and often where many new owners stumble. It requires time, persistence, diligence and leadership—tasks that cannot be easily outsourced and should be led by owners and the board. Below are some elements that help guide our selection process:
Scorecards: Develop scorecards that translate the business strategy into actionable skills, experiences and characteristics. These guide search partners in their hunt to find great candidates consistently and also provide future interviewers with a clear rubric for the questions to ask.
Search partners: Establish relationships with two to three search partners specializing in the roles you commonly need. Develop long-term relationships so they understand your style, needs and expectations.
Interview process: Our experience is that Goldilocks rules apply: not too many, not too few and just the right people. Ownership needs to test whether the candidates have the skills and experiences that the strategy and scorecard highlight, so only choose interviewers who can assess those areas well. Make decisions collectively, objectively and, most importantly, quickly.
Leadership assessments: While personality or intelligence assessments are common, Lion Equity takes a different angle: leadership assessments. How do our candidates make decisions? Will their leadership style work well with the existing team and culture? Will their approach to decision-making be effective given the strategy we need to execute? These are important questions a good organizational psychologist can help you think through.
Maintaining focus throughout this process is crucial. Searches that drag on can demoralize the company and deter top-quality candidates. Keep your eye on the ball and close those searches swiftly.
Accelerate the Transition
A common mistake operating partners make is taking their foot off the gas once a hire is made, leaving new executives to figure things out by themselves. Our experience at Lion Equity is that most new executives who struggle will fail within the first 12 months. To remove early barriers to success, owners should:
Provide context: Offer a half-day session with new executives to give them all the context they need about the company, including diligence outputs, operating strategies and an assessment of the company’s current position.
Define the mandate: Clearly define what success looks like for this role. Hold a session outlining the core objectives of the investment thesis and key results ownership will use to measure success, tying those both back to the new executive and their role.
Align incentives: Ensure everyone understands how success is measured and achieved, and what that means financially for the executive. This alignment helps executives start with the right focus and momentum.
Check-ins: Hold formal 90- and 180-day check-ins with new executives to understand their progress but also their lessons learned and observations along the way. Some of Lion’s best value-creation plan additions come from these check-ins, so don’t skip them!
Closing Thoughts
In all PE, but especially in carve-outs, building a company with the right talent is a key factor for success. While it takes time, effort and a bit of luck, following these guidelines helps Lion Equity consistently define, find and establish the right talent with a clear line of sight to success. //
Travis Dziubla is a principal at Lion Equity Partners, where he leads the strategy and operations efforts for the firm, including carve-out execution, integration support, strategy development and overall management of portfolio company performance.
Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.
