Change Management for Founders Undergoing Investment
How to manage change during an acquisition process in terms of leadership, operations, talent and value creation.
By: Leadership Dynamics team
Change management can be applied to any kind of organisational change, but for new portfolio companies, being acquired or taking investment is one of the first big moments that demands effective change management from the incumbent leadership team, and is often overlooked.
So how can founder-led companies manage change effectively when undergoing investment? In this article we will run through the responsibilities of a change leader and key strategies for the successful evolution of a portfolio company in terms of leadership, operations, vision and value creation.
The impact of investment
When a founder-led company seeks and accepts investment, it is opening itself up to large-scale changes. In many cases, the founder CEO role must expand to become a change manager as well as overseeing day-to-day operations.
Founders should recognise that private equity firms can offer valuable strategic guidance and resources beyond just financial support,such as access to new markets, robust operational capabilities and the ability to build out the leadership team around them. All of which can help accelerate growth and create value within the company. The flipside is that the involvement of a PE firm often brings increased scrutiny and accountability, which can help founders establish a more disciplined approach to business operations.
However, it is also essential for founders to be aware of the potential impact a private equity investment can have on company culture and operations. The introduction of a PE firm as a significant shareholder often results in changes in decision-making processes and reporting requirements. Founders must be prepared to collaborate with their new partners, be receptive to new strategies and open to embracing change as a growth driver.
Becoming a change leader is critical for founders navigating a private equity investment – to effectively communicate the rationale behind any strategic or operational changes to employees, while also remaining transparent about the company's vision and goals.
The role of founders in the investment process
Evaluating private equity partners
A strong private equity partner can provide not only capital but also strategic guidance, industry expertise, and valuable connections. During the due diligence phase, founders will assess the partner's track record, expertise in the company's sector, and alignment with the strategy for change management.
They will need to assess things like their investment thesis to find the right fit; their operating model so they know how involved they get in their portfolio companies; and their reputation from how they have managed previous investments.
Negotiating deal terms
The founder's experience and relationship with the potential investor can go a long way towards securing favourable terms, ensuring that the investment aligns with the business's strategic objectives. They will need to discuss valuation, so founders should have a clear understanding of their company's value and its basis, to ensure the right equity stake is offered to the private equity firm.
Establishing the right governance structure, including board composition and decision-making authority, is crucial for effective change management. And both parties should align on management interests and incentives as well as preferred exit strategies from the outset, as it can help set expectations for both parties and avoid potential conflicts.
Succession planning will be discussed during the deal, but it’s best practice for any company to have a succession plan in place at all times, as it becomes even more important when undergoing investment. Rapid scaling can stretch the competence of any leadership team, and if the founder is managing multiple departments, they will soon find it impossible to achieve the goals of the value creation plan. Understanding what skills, experience and behaviours are needed in each functional role in order to professionalise and scale is critical to staying on track, and will help hiring managers identify and select the right people at the right moments.
For founder succession planning to be successful, a founder needs to know what parts of the company they enjoy the most, and be able to relinquish control of the other aspects to skilled operators on the leadership team. It’s also important to ensure these other leaders work well together, which is why behavioural complementarity is such a big part of our leadership assessment process. People analytics tools (such as the PACE and Leadership Dynamics) can help both founders and investors see an objective picture painted using high quality data and help them agree on the future structure of leadership. Succession planning in advance can help both founders and investors align their objectives.
A screenshot of our Leadership Dynamics platform displaying a sample leadership team’s poor behavioural complementarity
The change management process for founders
Undergoing M&A aside, here is a tried and tested process for managing any kind of organisational change in a founder-led portfolio company.
1. Developing a change management plan
Successfully navigating a company through a private equity investment requires the creation of an effective change management plan that includes clear goals, desired outcomes and manageable steps for the team to follow.
Begin by identifying the key stakeholders – such as the board members, employees, investors, and customers – and communicate the objectives and expectations of the change.
Next, outline the steps needed to achieve these objectives using a change management model like Lewin’s, Kotter’s or Agile Change Management focusing on actionable tasks and milestones.
Lastly, incorporate both short-term and long-term targets, along with measurable criteria to evaluate progress and success.
Planning strategically is essential when considering private equity investments. Adaptability, communication, and unwavering commitment to the change management plan are vital in ensuring the founder's vision is preserved and the organisation thrives in its new reality.
2. Executing the change management plan
Once the change management plan is developed, it's time to execute it effectively. Founders should focus on strengthening leadership involvement, improving organisational culture and ensuring clear communication throughout the process.
To ensure smooth execution, it's crucial to have a strong and stable leadership team. First, involve senior management in the plan's design and engage them in promoting the change across the organisation. It’s important to remember that cultivating widespread support from the entire team will help accelerate the change process.
Next, integrate the plan into the organisation's culture. Consistent reinforcement of new practices and behaviours helps ensure the changes become ingrained into the company's ways of working. Founders must monitor progress, provide feedback, and offer assistance where needed.
Transparent communication at all stages of the change management process is key. Founders should keep channels of communication open to promote collaboration and address any concerns that might arise. This enables the company to maintain a sense of unity and direction while moving towards shared goals.
An effective and well-executed change management plan helps founders to establish a solid foundation for success during and after a private equity investment. By embracing these change management strategies, founders can unleash their organisation's potential while ensuring its longevity and growth.
Change management strategy before, during and after investment
Preparing for investment
It’s vital for founders to be prepared and understand the intricacies of M&A transactions. At the very least, they need to have a clear understanding of the company's value proposition, financial performance, market position and growth prospects and be able to articulate them all.
During the due diligence process, private equity firms will thoroughly examine the target company's financials, operations and legal aspects. M&A transactions are complex and often involve intricate negotiations so finding good legal and financial advisors to help in structuring equitable terms and favourable deal structures as well as assessing potential risks and liabilities associated with the transaction.
Understanding the qualities of the incumbent leadership team will help investors see their value when formulating the value creation plan. If the company has a clear analysis of the leadership team (usually this comes out during a succession planning exercise) this will give all parties a clear picture of skills, experience and behaviours.
A Leadership Dynamics functional balance chart, which includes two continuous axes, from Strategic roles to Tactical roles (y axis) and from Value Creation roles to Value Measurement roles (x axis).
It’s our experience that knowing the behaviours of a leader is a far better predictor of success than simply looking at past performance and personality. While personality is static (what is a person like at rest?), behaviours are dynamic (what is a person likely to do in this situation?).
Our PACE behavioural analytics model runs with this idea. Built using data from the past ten years of successful private equity transactions, it benchmarks individuals and teams against the behaviours critical for success that are seen among the top-performing leadership teams.
This is where change management is crucial to get right.
Successfully integrating a company after an M&A transaction is critical to realising the full potential of a private equity investment. The most important aspects are:
Communication: Clear communication with employees, customers, and partners is essential to maintain trust and reduce uncertainty during this period. A well-developed communication plan should be set in place to address concerns and maintain transparency.
Operational synergies: In terms of operations, it is vital to identify synergies between the two organisations and prioritise activities that will create the most value, especially if this is part of a bolt-on or roll-up M&A strategy within the fund. This may include consolidating operations, implementing new processes, or streamlining the supply chain.
Nurturing talent: Integration teams should focus on preserving and nurturing the talent pool during a merger or acquisition. This includes fostering a supportive culture, addressing cultural differences, and promoting career development opportunities for employees.
Adaptability and agility: As market conditions change, adjustments may be required to achieve optimal results. By continually evaluating the progress of the integration and making necessary adjustments, founders can successfully lead their company through a private equity investment and capitalise on growth opportunities.
Creating long-term value post-investment
Once integration is underway, founders should focus on creating long-term value to ensure the growth and sustainability of their company. One effective way to achieve this is by developing a clear strategy for change management to streamline operations, strengthen the organisational foundation and align stakeholder interests.
Founders need to be able to establish their company's purpose and articulate a value creation approach that caters to stakeholder expectations. Regular meetings and transparent communication will help in building trust and demonstrating commitment to long-term objectives.
Employees play a critical role in implementing company strategy and generating innovative ideas that contribute to success and growth, so founders must ensure that their team is motivated and prepared to adapt to change. This can be achieved by investing in professional development, offering competitive compensation packages and promoting a healthy company culture.
Effectively leading a company through a private equity investment requires a strategic approach to change management, with a strong focus on talent and a commitment to meeting stakeholder expectations. By incorporating these principles, founders can build long-term value creation and ensure the growth and sustainability of their evolving organisation.