The first Monday morning after the takeover. The coffee is the same. The customers just call. The diary is full. And yet something has fundamentally changed.
After an acquisition by Private Equity, the company is run differently. Less by habit. More by new ground rules. Less room for "we always do this this way" and "I'll just call the owner". Decision-making must be more formal, in writing. Does what I want still fit within the mandate?
So for Management, the biggest shock is not in extra reports. Those are coming too. But the real shift is legal and managerial. Who gets to decide. Who has to approve. And what happens if you leave, voluntarily or otherwise.
From trust to rules
In many founder and family businesses, managing a business is based on trust. Everyone knows the route. You know who to call. You also know when you can just thrive.
Private Equity does it differently. Not necessarily out of distrust. But because there is a plan. With a timeline. And usually with external funding. Then rules of the game are not a luxury, but risk management.
Those ground rules land in three documents:
- the articles of association (who can do what, and how);
- the shareholders' agreement (agreements between shareholders);
- regulations for management board and often a supervisory or advisory board.
In practice, this means: more consultation moments. More preparation. More set rhythms. And a supervisory body that not only advises, but also steers. That takes getting used to. But it can also be a relief. Clear roles give peace of mind. Provided the rules are workable. It is also a professionalisation exercise.
The approval list: locks on the door.
Daily life changes mainly because of one annex. The approval list. That is the list of resolutions requiring prior approval from shareholders or board.
So which decisions are often involved?
- investments above a threshold;
- new loans, refinancing and collateral;
- acquisitions and sale of parts of the business
- major contracts (long duration, exclusivity, different terms)
- appointment/dismissal of key staff;
- deviation from budget or business plan, outside ranges.
That Private Equity wants to retain control over these types of issues is not surprising. But it can also become oppressive and curtail Management's entrepreneurship too much. Thresholds are sometimes too low. Or formulated too broadly. Then everything becomes an "approval point". And then the operation stagnates.
So make sure that the list of topics for which Management needs approval from the shareholders' meeting remains workable. Ultimately, this is also in Private Equity's interest:
- realistic threshold amounts;
- clear exceptions (everything in the business plan already counts as approved);a
- practical decision-making route (who decides, how quickly, what information).
More figures, but above all: more rhythm
Yes, reporting is increasing. Monthly. Sometimes weekly. Cash-flow, working capital, margins, order book, space under bank agreements.
That quickly feels like "being ruled by numbers". Sometimes they are. Yet there is a healthy variant. Then numbers are not a weapon, but a tool. Problems surface sooner. There is more grip, adjustments can be made in time.
Management does well to broaden the conversation. Not only "why is it red?". Also "what is the plan?". Not just KPIs. Make the right choices.
Share in the value, subject to conditions.
Almost every mid-market PE deal has some form of management participation. Shares. Options. Often made possible on attractive terms: "sweet equity". The idea is simple: if the company's value rises, you as management share in it.
Pay particular attention to four themes:
- Accumulation (vesting) When is the stake really yours? After the passage of time? After achieving goals?
- Dilution Are new people also allowed to participate? Logical. But what does that do to your percentage?
- Dragging along and hitchhiking In sales, management can be dragged along (co-selling) or hitchhiking (right to participate).
- Leaver arrangement: when leaving, you are obliged to offer your participations. The price you then receive is made dependent on the reason for leaving.
Is there a balance between risk, influence and information? If not, "joining" quickly feels like "co-paying".
The departure scheme: where it gets personal
The severance arrangement is often the most underestimated part of agreements with participating management.
The key questions:
- when are you a Good Leaver, Early Leaver or Bad Leaver? These qualifications listen closely. Are you already a Bad Leaver if you fail to meet certain KPIs? Or only if you have to leave for an urgent reason ("summarily")?
- at what price should you offer your shares in the various Leaver situations. Bad or Early Leavers get penalty discounts on their participation. But how much?
- how does the procedure work (deadlines, payment, valuation).
You regularly see hard variants. Deliver back at face value if you are Bad Leaver. Even if this happens after years of hard work. Therefore, discuss scenarios. Not just definitions.
For example, what happens in the following scenarios:
- forced departure after a change in strategy that you as a manager do not support?
- and in the event of long-term disability?
- you get into conflict with a new CEO;
- and what happens in the event of a disappointing year?
- or a quick resale by the private equity shareholder?
If you discuss these kinds of scenarios well in advance, you avoid the arrangement only becoming "clear" the moment the scenario actually occurs.
Changes, but will it be better or worse?
It's just how you look at it. Private equity can professionalise. Roles are filled better. Responsibilities well divided. Decisions are traceable afterwards. And if incentives are set up properly, real focus emerges.
But Private Equity can also stifle. When Management has to seek approval for everything. When the figures rule and serve only to settle accounts. When the departure rules are so harsh that people stay out of fear instead of real motivation.
The lesson for management is simple. Don't just negotiate your share price and job title. Negotiate the rules of the game.
Because the day after the transfer, only the coffee will be the same.
More information.
Are you on the eve of a PE deal or in the middle of one? Get the ground rules right before closing. Contact Onno Cusell or one of the other professionals from the Corporate/M&A team and avoid having to make adjustments afterwards.
