Taking CEO job with plan to buy company in 1-2 years - align incentives? - Searchfunder

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by a searcher from London Business School
in Johannesburg, South Africa

4yrs ago

Taking CEO job with plan to buy company in 1-2 years - align incentives?

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 inredactedmonths, 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.

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reply by a searcher 2yrs ago
from The University of Chicago in Denver, CO, USA

Great advice here. If I had something this formal in a past job, a deal might have gone through. Instead, I wasted over a year on a company, growing them substantially and opening a new sales channel for them, only to find an owner with very selective amnesia and an unwillingness to sell her new cash cow. Word of caution to future searchers. Don't enter a leadership role with an informal agreement in place.

reply by a searcher 10mos ago
from New York University in Toronto, Ontario, Canada

Hi Rod - I'm looking at doing this right now with an SMB - do consulting work & acquire them in phases . Would love to hear your challenges you faced. Can I DM?

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