The Preferred CEO Profile

Investors and buyers will evaluate a CEO as an individual as much as they evaluate his company as an asset. In this way, investors often find themselves playing the role of psychologist, trying to determine what about your background, skills and motivation makes you a good investment.

We asked 88 deal professionals to define their “ideal CEO.” Background, Skill Set, and Experience Investors often find themselves working with executives who are new to the CEO seat. Particularly in a situation where the CEO is looking for a full exit, or if a CEO is not performing after one or two years under the new ownership, a replacement or recruitment often leads investors to consider external industry executives or internal management team members for the role. When working with a first-time CEO, here’s what investors say is the most preferred functional background.

Q: WHAT FUNCTIONAL BACKGROUND DO YOU PREFER IN A NEW CEO?

Whether an individual has served as a chief executive or not, their skill set will be heavily evaluated when as an investor considers who can successfully lead their portfolio company through growth. Here’s how deal professionals rated the importance of the various skill sets a CEO can have:

Q: BESIDES SETTING OVERALL STRATEGIC DIRECTION FOR HIS / HER COMPANY, WHAT IS THE MOST IMPORTANT SKILL SET IN A CEO?

Finally, when it comes to evaluating how prepared a CEO will be to grow the company under the ownership or partnership of an investor and how seamlessly a deal may unfold, investors will often look at the experience a CEO has had. Here’s how investors rank the various types of experiences a CEO might have from most important to least important:

1st Industry-specific experience

2nd Prior CEO experience

3rd PE-backed experience

4th International experience

5th A college education

Relationship to the Business The motivations a CEO might have for raising capital or selling a piece or all of his company are heavily influenced by his relationship to the business. Founder operated or family-run businesses are much more likely to have a CEO with a strong emotional attachment to the business that will impact his decision about who, when, and how he sells or brings on a growth partner. While investors are certainly attracted to the passion that comes with familial or founder ties to a business, this can also bring challenges to a deal. This type of CEO is much more likely to be concerned with the financial futures and well being of his employees, particularly other family members who are involved in the business.

This type of CEO also might be overly concerned with preserving his own personal (or family) legacy which has likely been built together with the business. As a CEO, you should understand that while founder or family status might make you a more attractive candidate to investors or buyers, they will be keen to learn about the particular motivations and stipulations you might have for the deal because of this unique relationship to your business.

Q: DO DEAL PROFESSIONALS PREFER TO PARTNER WITH CEOS WHO ARE ALSO FOUNDERS OF THE BUSINESS?

Incentives & Performance Unless the CEO is exiting the company completely (read our Guide on Leveraged Buyouts to learn more about what happens to a CEO when they are bought out entirely by a private equity firm or other type of buyer), he or she is often considered a part of the deal package. As such, firms will often set aside a specific percentage of the capital deployed into that particular company as “CEO investment.” This investment could be spent in many ways including compensation increases or restructuring, performance incentives, or executive development.

HERE’S WHAT INVESTORS TOLD US THEY TYPICALLY DEDICATE TO CEO INVESTMENT AS PART OF A PERCENTAGE OF CAPITAL RAISED:

Q: WHEN INVESTING IN FAMILY-RUN BUSINESSES, WORKING WITH A CEO WHO IS PART OF THE FAMILY MAKES THE PARTNERSHIP:

Incentives & Performance Unless the CEO is exiting the company completely (read our Guide on Leveraged Buyouts to learn more about what happens to a CEO when they are bought out entirely by a private equity firm or other type of buyer), he or she is often considered a part of the deal package. As such, firms will often set aside a specific percentage of the capital deployed into that particular company as “CEO investment.” This investment could be spent in many ways including compensation increases or restructuring, performance incentives, or executive development.

HERE’S WHAT INVESTORS TOLD US THEY TYPICALLY DEDICATE TO CEO INVESTMENT AS PART OF A PERCENTAGE OF CAPITAL RAISED:

When an investor enters the picture (and likely, joins your board of directors), a CEO will have a new individual and/or group judging his performance. Depending on the structure of the deal and the ownership an investor has in the company, it is possible that an investor could call for the removal or replacement of a CEO if they are not meeting the goals set forth as part of the partnership.

THE DEAL PROFESSIONALS WE SURVEYED TOLD US HOW MANY TIMES THEY NEEDED TO REPLACE A CEO BASED ON POOR PERFORMANCE: