Negotiating Employment With a Private Equity Firm - 7 Surprises to Expect
ACTUAL CASE HISTORY: Fourteen years of hard work had paid off for Enrique: he'd risen to Executive Vice President of a privately-held firm that was one of the country's largest providers of continuing medical education for surgeons. He was number two to the firm's founder, and the only non-family member among the senior-most executives. Enrique was considered by all to be a good prospect to run the company one day. The founder, who was 64, had been speaking of retiring for some time.
One Friday morning, in a private meeting with the firm's founder, Enrique was notified that the family had decided to sell the company to a "private equity" [sometimes called "PE"] firm, a company that invests the capital of pension funds, endowments, trusts and wealthy individuals in companies with an eye to revitalizing them so they can later sell them or take them public at a large profit. Enrique was assured that if the sale went through, he would have job security, because the buyers were intent on hiring him to run the firm for them. Enrique would also be receiving a hefty bonus - a "success fee" - if the deal closed, to encourage him to remain through the closing, and to align his interests with the family's.
After meeting the "PE" firm's team, who were headquartered in Boston, Enrique was convinced he was soon to have his "day in the sun." Not only would he become the firm's CEO, but he was being offered a share of the PE firm's profits on the eventual resale of the company. Enrique did all he could to make the family's sale happen, and the transaction was slated to close in a few weeks. One problem arose: Enrique just couldn't seem to get the attention of Jeremy, the PE firm's partner who was shepherding the deal, to discuss his own terms of future employment. Enrique was hoping to "raise the platform" he'd enjoyed these past years, with hefty increases in base salary, incentive compensation, benefits and longer-term compensation, in line with his new, CEO-level responsibilities. However, he was unable to get Jeremy's attention, until the day before the closing.
Just hours before the sale was to take place, Jeremy called Enrique and outlined the proposed terms of his new employment: first, his salary would be cut by "only" 20%. Second, benefits and perq's were to be lowered significantly. Third, Enrique was to be rewarded with a share of the PE firm's profits (as they defined them) when they sold the company in a few years, provided he was still then in his job, which was not guaranteed. Perhaps most troubling, Enrique was guaranteed only one year of employment, but his contract included a three-year "non-compete" agreement. His attorney commented, "Your contract has more loop holes than a hooked rug."
Enrique signed his new contract, the closing took place, and he did become the company's CEO. The "ride" was not at all what he had expected, though. It just wasn't the same company. Significant debt was immediately added to the company's balance sheet, which was used to reward the PE firm's investors. Expenses, including employee compensation at every level, cherished benefits and many customary holidays, were slashed. Yes, it was a different company, with different goals, and different values. While Enrique was CEO, financial constraints left him with little say or true control over how the company was operated...It was now a "portfolio" company, one that was held, first and foremost, only to be soon sold, as "inventory."
LESSON TO LEARN: Working for a company owned by a Private Equity firm is different in fundamental ways from working for either a privately-held company, or a publicly-held corporation. Why? Because the goals, and the values, of Private Equity firms are essentially different from those you've likely been used to, and those you may be expecting.
PE firms typically seek to re-energize by refocusing, restructuring, reinvigorating - and then sell firms on a short-term horizon, generally 3 to 5 years. While PE firms commonly take a management fee of 1.5% to 2% off the top each year, their primary goal i