Expert opinions vary as to whether an acquired business is ultimately more successful when the founder remains at the helm or steps aside to welcome in a new CEO. Investors would benefit from developing a clear point of view: either a rule of thumb, or an agreed-upon set of criteria used consistently to inform the decision.
We interviewed 20+ private equity investment professionals and CEOs, all with direct experience acquiring founder-led companies. One theme was consistent: alignment around the growth strategy is a critical factor both to close the deal and to drive out-sized returns. Despite its importance, true alignment is often unattainable, for a couple of reasons.
Not threatened by A-players, these founder-CEOs put visible effort into developing, stretching and mentoring their executive team. They give credit where credit is due and readily incorporate input from others. Aware of their own skill gaps, they surround themselves with leaders and advisors who excel in those areas. They are not blinded by loyalty or lulled into complacency; they proactively upgrade their teams when needed.
Gaps in training, experience and education are common among founders, who often embarked on their entrepreneurial journey single-mindedly and at a young age. Those gaps are disconcerting when founders do not know what they do not know. Blind spots, especially in areas critical to the value-creation strategy, suggest trouble ahead. Self-aware founder-CEOs are candid about strengths and weaknesses, open to feedback, coachable, and nimble amidst changing priorities.
PE partnership brings many new sources of knowledge: investing and operating partners, a network of portfolio companies, and best practices from other industries. Learning CEOs express genuine excitement and thrive on expanding their fund of knowledge. Evidence shows up in the books they read, the seminars they attend, the roundtables they organize and the questions they ask. Those who see PE investment as an intellectual growth opportunity, not just a financial one, have a much better chance of succeeding post-acquisition.
Founders of successful companies are often defined by a resolute determination to execute, a strength that can easily teeter toward intractability. Effective founder-CEOs reject the belief that what got us here will get us there, and take pride in their ability to pivot or course correct. They pursue solutions that will make their businesses best in class and profitable, regardless of where the ideas originate.
Compared with companies led by non-founder-CEOs, S&P 500 companies with founder-CEOs are more innovative, generate 31% more patents, and create patents that are more valuable.
Though technically no longer a start-up, the all-hands-on-deck approach necessary during the early years is difficult to unlearn. Many founders immerse themselves in the details, meddle in their direct reports' decisions and hold tight to customer relationships. Enamored with the trees, they fail to focus on the forest and lead strategically. Their need to touch every decision creates bottlenecks, threatens retention of the best talent, and brings the speed of execution to a halt.
To execute at the magnitude and speed required to achieve the investment thesis, organizational capabilities and talent must scale quickly, starting with the founder. Assessing the founder's runway across strategic leadership, business acumen, talent management and industry knowledge is imperative. Skill gaps can be augmented with a strong executive team, but investors are wise to be honest about how much they can prop up a CEO who lacks the runway for the journey ahead.
The founder and the organization's DNA are often one and the same. Market conditions, economic trends and industry innovations may require a distinct change in direction. Beyond investing in new capabilities, upgrading talent or pursuing more efficient systems, there are times when the changes ahead truly reshape the company's identity. Retaining the founder who created that identity can pose an insurmountable challenge.
Even with robust diligence, investors occasionally remain on the fence about a founder-CEO. Thinking toward exit, and whether the next investor is likely to keep the CEO in place, can be a helpful gut check. If a future investor is unlikely to keep the founder-CEO, succession planning becomes a high priority to protect the future value of the investment.
Despite early success, founders are less able to continue firm expansion mid-tenure. The more time a founder spends in the CEO role and in the industry, the more committed they become to the status quo, partially explaining stalled growth. Entrenched founders who resist change also constrain new, externally hired CEOs when they remain on the Board.
Determined, practical and resilient, this founder-CEO had been affiliated with the industry for 30 years. Ahead of her time and fiercely committed to efficiency, she pushed for the first fax machine and computer in the office. Twenty years later she implemented a recommendation from a part-time analyst that solved a complex logistics problem and widened her company's geographic reach for recruiting. Candid about her experiential gaps but always eager to learn, she joked that a future autobiography would be titled "Observations From an Airport Business Book Junkie." She completed a massive turnaround; fifteen of seventeen markets met or exceeded top-line goals within twelve months.
Starting his business with his brother at age twenty with a truck and two pieces of equipment, this founder-CEO was the poster child for the American success story. But wealth and reputational clout, combined with resolute ambition, led to entitlement, explosive exchanges with senior leaders and a stubborn conviction that he knew best. Key executive positions were filled by unskilled confidants who had shown undying allegiance. Although he told investors he was ready for the next chapter, deeper diligence revealed a firm belief that the business would not survive without him. Post-close he insisted on remaining hands-on, stalling growth initiatives and delaying transition plans, which cost investors time and money.