Private Equity Optimizes for EBITDA—Not Ego, Legacy, or Relationships. It’s as simple as that (almost).
Dear Stephen,
I work for a great company. A luxury residential brand that sells textiles and furniture. We are on every decorator's list, and the company was family owned forever. The family was part of the brand. Then, about 5 years ago, the family sold out to private equity. After the end of the first year the family members left, and since then, we have had 3 CEOs in 4 years!
This phenomenon of turnover is not just at my company. I hear from friends of mine in the interiors field, both contract and residential, where PE has purchased their company, that when PE takes over, the CEO or any of the high-level leadership becomes a revolving door. I have seen it in carpet companies, outdoor furniture companies, contract furniture companies, you name it. Why is no one talking about this?
To be clear, I am not talking about "mergers" with other interior companies -- like when Knoll acquired Holly Hunt, or Herman Miller and Knoll became MillerKnoll or even now with HNI acquiring Steelcase -- it seems to work in those scenarios. I am only talking about private equity companies buying into our industry and bringing with them new ideas and new leadership. New ideas and new people would be great if we were not having such high turnover that it is affecting productivity.
I've been in the interior design and furniture industry for a long time; it's a tight-knit industry built on relationships and old-fashioned values. Personality of the brand counts, along with the legacy of a brand. I know it is important to have a smart CEO or President who understands P&L and EBITDA, but those individuals I see being brought in now tend to alienate existing sales leaders and just don't get what our industry is about. As a result, sales suffer and it trickles down the line to sales teams and showrooms around the country and they flop. Any thoughts, Viscusi?
Signed,
I'm About to Quit Too
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Dear Quit, Too:
Private Equity Optimizes for EBITDA—Not Ego, Legacy, or Relationships. It's as simple as that (almost).
Everything you're saying is something I hear and see on a regular basis. There are two reasons that recruiters have a field day when PE takes over your company: The first is fear of the unknown and the natural instinct to start looking for a job; the second reason is the intimidation factor caused by PE bringing in leadership from outside the industry, setting off alarm bells with the current employees. As a recruiter we know if we call anyone who works there, it does not take much convincing to poach the employee away - and most of the time we do not even have to call them because they are so nervous they call us, asking what jobs are out there for them.
I see a trend in residential and textiles companies, as well as office furniture companies. I even see it in outdoor furniture companies, tile and stone, residential, hospitality, you name it - PE wants to buy it! But so far, they're having difficulty making it work. Part of the answer to your question is that this is an HR problem not a PE problem.
While the PE company may make it so that there is a cleaned-up balance sheet and fresh ideas, they end up clearing out all the sales team and leaders that were bringing in the revenue. What happens is they're left with a shell of the original brand. That's the HR debacle that I'm talking about.
My recommendation to PE firms is that it is okay to hire an "outside of the box" leader if the outsider has insider sensibilities. Finding those individuals is a long and specialized recruiting process because strong leadership that understands our cliquey industry is hard to find. In order to do that, the PE firm needs to invest more in finding the right recruiting partner who will find the right leader that won't come in and scare all the existing salespeople (and customers) off.
Truth is, there is sophisticated leadership within our industry. Sometimes PE leadership is too quick to write off hiring someone from inside the industry, which is ironic since those are the very people who made the industry so attractive that PE is investing heavily in it. These quality executives exist, they're just hard to find. Maybe you just need to know where to find them.
I do want to point out that sometimes turnover at the CEO level is actually part of the strategy when a PE firm buys a company. That strategy can work – picture this plan: they hire one CEO to stabilize post-acquisition, they hire the next CEO to then grow and build out revenue, maximizing value, and then they hire the final CEO to manage the exit. That is another story for another column, but the strategy does work.
Finally, employees need to remember work is not a democracy - you don't get a vote, so those legacy salespeople, as good as they may be, can always be replaced too.
Please remember, if you like your job and you like the company, try and make it work. You can do that by learning what the new leadership's objectives are and see if you can match those objectives. If you can't, it is time for you to find a new company to work for because private equity acquiring companies in our industry is here to stay.
Think of the alternative, which is that most of the time PE is rescuing these brands. If they didn't, you wouldn't have a job at all!
Signed,
Stephen