I am currently working as interim-CEO of a light manufactring company, with the option of taking the job full time.
The company is owned by a micro-PE fund, whose fund is closing in 2024 so they will be looking to exit the investment by then. Currently the compnay is in a turn-around situation, though progress is being made and I see great potential for the company going forward.
The CEO job itself is not a particularly attractive role for me, as there is little equity on the table. However, I would consider taking the job if I could see a path to acquiring the company down the line, once it has been stabilised and shown some consistent profitability.
I have a very good relationship with the managing partner of the PE-fund who is willing to discuss options.
Question: How could we structure an agreement now so that I take the CEO job, with the agreement that I can buy out the PE fund in###-###-#### months, without getting misaligned incentives?
I don't to end up in a situation where:
1) Any progress shown by the company just means that i'm driving up the purchase price, or multiple that I would pay to buy it
2) I put in a couple of hard years improving the company, only for the PE fund to find some strategic buyer who can offer to purchase at a price I can't compete with
Similarly the PE fund presumably doesn't want to end up in a situation where:
1) I hold back on implementing improvement initiatives, or sandbag performance until I own the company myself
2) They end up in a situation where I hold them hostage when time comes to sell, with the threat to leave the company without a CEO and difficult to sell to anyone else, unless they sell to me at a discount rate
I thought of discussing a sales multiple now, that would at least allow for us both to be happy with growth pre-sale - but this does not account for multiple expansion/contraction if things go better or worse than exepcted.
Another option would be to agree "first right of refusal" at sale - but this again leaves me at risk of putting in 1-2 years work to grow big enough for a larger PE fund or strategic buyer to swoop in and buy out at a price I can't compete with.
Taking CEO job with plan to buy company in 1-2 years - align incentives?
by a searcher from London Business School
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In the end we weren't able to align timeline and incentives. It was clear to both of us that the company needed 4-5 years of very strong turnaround performance (20% revenue growth per year) to achieve the return the PE fund required. This was obviously a very bullish scenario, and even then would only result in a not great return for the fund, and not give them much extra "pie" to share. The fund was able to negotiate to extend their hold period for another 5 years to try and realise that potential.
They were not prepared to commit to sell to me in###-###-#### months as this would have resulted in a big loss for them. I was not prepared to wait 4-5 years to purchase the company.
The fund offered for me to be CEO for that 4-5 years, at a market matching salary +5-10% equity. However, in the end I decided that if I was going to sign on to run and grow a company at +20% a year then I would rather do it through the self funded Search Fund model, where I could have >50% equity.
Obviously with the SF model I will have to spend time searching, and will face a large acquisition risk - but then I expect to be buying a much more stable company that isn't in a deep turnaround situation.
In the end I extended my contract as interim-CEO to allow the fund time to hire, and do a handover with another CEO who seems like a very good candidate. Some great experience for me, and outcome from them as well.