AXIAL FOR CEOS

THE CEO'S GUIDE TO

PASSING THE
INVESTOR TEST

THE SELLER SERIES

 Table of Contents
Three Qualities of a Capital-Worthy CEO ................................................................................ 4

The Investor Smell Test: A Checklist ........................................................................................... 6

The Preferred CEO Profile..................................................................................................................8

The Importance of Building (and Selling) Your Management Team........................ 13

One Way Advisors Will Evaluate a CEO....................................................................................16

Resolving Conflict in the Deal Process......................................................................................19

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 What makes a great CEO? :3

It’s a question that has many different answers to many different people. For a
CEO who is looking to raise capital or find a buyer for his business, the opinion
he cares about most, however, is that of the investor.
When looking for their next greatest deal, investors aren’t just looking for a
company with a great product, solid financials, and a loyal customer base.
They’re looking for a company that has been built and run by a great leader —
someone who can continue to grow the business with their capital and advice
behind them or someone who is motivated and prepared to pass the torch to
the next generation of leadership in a seamless and elegant transition.

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 Three Qualities of a :4

Capital-Worthy CEO
Having a strong leader at the helm of a company makes it a more attractive
investment to a debt or equity investor, or an acquirer of the business. Although
each investor values management traits differently depending on their focus, there
are three broad categories that investors see as critical.

Strategic Focus
A CEO’s strategic focus is key to where the business has been and where it is going.
Investors take interest in companies that have a vision for future growth based on
a well-developed industry expertise. Investors put a high value on specialists, and a
“When an CEO’s strategy for the business should reflect their deep experience in the industry.
investor is The CEO and company must have a proven program to manage product development,
considering customer relationships, and intellectual property, creating appropriate barriers to
backing a current and future competition.
company, an
executive’s From an equity or debt fund’s perspective, it is not difficult to assess a CEO’s focus.
business plan An executive’s business plan is the first place to start. That plan should include
will be the a description of where the company has been and where it is headed, including
first place products and addressable markets. It should be clear to the investor how the CEO
they start.” has driven the company’s success through his/her strategy. An evaluation of the
company’s historic and forecast financial performance provides the true test.

Confidence
When investors first meet a CEO, they expect to hear a cohesive description of
the business, its history, and its outlook — and investors want to hear this from a
confident and articulate CEO. Demonstrating passion about the business and a sense
of urgency around its growth opportunities are critical. Confidence can be further
communicated through examples of the CEO’s historic persistence in achieving the
best possible results for the company.
Many CEOs find it natural to be passionate about their business and its value. Their
confidence, however, needs to extend to the persuasive when discussing their

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 outlook for the business, innovation, product, and/or market. Investors are listening :5
for this reasoned confidence, indicating that the business and its CEO are worthy of
their time and investment. Of course, investors are also looking for financial results
that support the CEO’s confidence.

Integrity
Integrity involves applying a sense of what’s right in dealing with stakeholders
fairly and transparently. This will include employees, customers and, broadly
speaking, suppliers (including capital sources). When a CEO manages a company
with integrity and demands the same from his team, the business has the ability to
operate at peak efficiency under the leadership of the CEO and the culture he or
she has established.

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stakeholders.
-Manfred Kets de Vries, INSEAD

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 The Investor Smell Test: :6

A Checklist
Every investor has a list of qualifying questions they ask when introduced to a
CEO or business owner for the first time. It goes without saying that you should
expect and be prepared to have a detailed discussion around the business model,
organization, financials, and growth picture of the company. In addition to this
baseline information, investors may use the first couple of meetings or calls to start
to develop a fuller picture of the business and begin to identify both the unique
risks and advantages of investing in your company. We’ve compiled some of the
most common questions investors say they ask in the first 1-2 meetings with CEOs
to help you prepare as you begin to market your business, and more importantly,
yourself, to potential investors and buyers.

On Business Operations:
ɚɚ What is your relationship with your suppliers?
ɚɚ What is your customer/payor mix?
ɚɚ How are decisions being made internally?
ɚɚ How are business strategy plans made, executed and outcomes analyzed for
improvement?
ɚɚ Explain your R&D process.*
*If applicable — If this is an area of focus, be prepared to talk about successful
product launches and projected CAPEX.
ɚɚ Who is part of your team? Explain their roles and contribution and the
investment you’ve made in the team and talk about team dynamics.

On Business Risks:
ɚɚ What has been your biggest misstep as a company?
ɚɚ What economic/macro trends have worked against you in the past?
ɚɚ What are your competitors doing better than you?
ɚɚ Is there any seasonality or predictable variability in demand for your product/
goods/services?
ɚɚ Are their any pending litigation, Medicare claims, lawsuits, etc.? What are the
details if any?
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 On Your Motivations: :7

ɚɚ What are your goals in exiting or finding a financing partner for your business?
(maximize price? legacy of your company?, take care of your employees? retain a
minority/majority ownership? etc.?)
ɚɚ What do you stand to lose by not completing this transaction?
ɚɚ Do you care?
This isn’t so much of a question you’ll be asked to answer, as it will be one an
investor infers from your actions and behavior during the first few meetings. If
an intermediary is hard to get a hold of, slow to respond, or generally curt, an
investor will make assumptions about the likelihood that they’ll get anywhere
with the opportunity. If a seller provides incomplete responses, shows up late
for the management call, or doesn’t make much of an effort in the conversation,
they’ll make assumptions about what you’re seeking — other than a check.
ɚɚ Would we want to have dinner with you?
(One investor cited their strict No A**hole Policy which implies they only invest
in owners and CEOs with whom they can get along.)

On the Transaction Process:

ɚɚ What is your timeframe?
ɚɚ Do you plan on remaining with the company post-transaction?
ɚɚ Have you already been approached by, or are you already in discussions with,
other investors or buyers?

“There have been several instances in which we’ve dialed in to a

scheduled call [with a CEO], just to be asked, “What firm are you
from again?” If we’ve scheduled a management call with you, we’ve
put serious time and effort into preparing for that call. If you don’t
know at least the baseline facts about our firm, we infer a lot. To put it
another way, if you’re not looking into the credibility and perspective
of your prospective buyers, there’s a better than fair chance you’re not
a viable opportunity.
As a side note for sellers, it’s okay to ask us hard questions, too. In fact,
we welcome it.”
-Brent Beshore, adventur.es

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 The Preferred CEO Profile :8

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?

49% 32% 9% 5% 5%
Operations Sales Finance Marketing Product

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:

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 Q: BESIDES SETTING OVERALL STRATEGIC DIRECTION FOR :9
HIS / HER COMPANY, WHAT IS THE MOST IMPORTANT SKILL
SET IN A CEO?

60% Leadership/Organizational Management

20% Sales & Operations

14% Business Development/M&A

7% Capital Allocations

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

Investors
2nd Prior CEO experience rank college
education as the
3rd PE-backed experience
least important
4th International experience experience a CEO
can have.
5th A college education

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 Relationship to the Business : 10

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 wellbeing 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?

DOE
SN
’T M
AK
E
S A
YE

43%
IF
FE

49%
RE
NC
E
NO

8%

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 Q: WHEN INVESTING IN FAMILY-RUN BUSINESSES, : 11
WORKING WITH A CEO WHO IS PART OF THE FAMILY
MAKES THE PARTNERSHIP:

DOE
SN
’T M
T AK
UL E
IC A
FF
DI

D
IF
RE

FE
35%
MO

60%

RE
NC
E
<
5%
LESS DIFFICULT

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:

< 5%
14%
33%

25% 5%-10%

> 10%
28%

Does not apply

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 When an investor enters the picture (and likely, joins your board of directors), a CEO : 12
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:

Never
25%

48%
9%
5+ times 1-2 times
17%

3-5 times

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 The Importance of Building : 13

(and Selling) a Great

Management Team
Every growing business needs a strong management team in place to help it
accomplish its goals. Particularly when it comes to a business that is preparing to
sell, having a solid team to both keep the business running during the sale and help
manage the transition post-sale is paramount to a successful outcome for both
buyer and seller.
While the CEO is often the apple of investors’ eyes, buyers will also evaluate the
senior leaders within a company to get a sense of the potential of their investment.
After all, even the most well-capitalized companies need the right team to execute.
In this way, building and showcasing a strong management team to potential
investors or buyers can help a CEO attract the best parties to the table and
successfully bring a deal to close.
No, this evaluation is not something you can put numbers around. Though
many important attributes of management teams are intangible, a framework
for assessing the strengths or weaknesses of such a team can help to determine
whether they will be an asset or how to make improvements prior to pursuing
a deal.
The following four lessons should be considered both as you build your team in the
years leading up to an investment or sale, as well as when it comes time to involve
the team in an a deal process:

1. When Bringing Teams in on a Deal — the Earlier,

the Better
While CEOs sometimes wait to bring their teams into the discussion and planning
around a sale or acquisition, the sooner the right people can be informed and
involved, the better. Due diligence starts almost the moment a letter of intent
is signed, and surfacing all of the information that will be part of that process
at the onset will help a seller more accurately present his company to investors.
As questions come up during the due diligence phase, you will feel much more
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 comfortable having your business line leaders available to defend and explain any : 14
queries about the various pieces of the business.
From an investor or buyer’s perspective, the CEO who comes to the table with his
senior leaders already aware and a part of the deal is likely much more prepared to
engage in a thorough and clean due diligence process. It’s also a signal that a CEO
relies heavily on his team and trusts them enough to have them in the room even
during the earliest stages of a deal.

2. Management Teams Are Critical for Business

Performance During the Deal
Once the deal is off the ground, your attention as CEO will be elsewhere. Because
the sale of a business can often take months, even years, it’s an important time
for the management team to be able to run the show. Particularly because a final
purchase price for the business will be based off of a multiple of EBITDA and
any turn in performance could mean a less than desirable financial outcome for
you as the seller, ensuring business continues as usual during a lengthy and time
consuming deal process is vital.
For an investor or buyer, knowing a business can maintain steam without the CEO at
the helm is a crucial test in situations where the CEO plans to fully exit the business
or step back his responsibilities considerably. This is also a time where a natural
replacement for an exiting CEO could emerge. Many buyers bring operational
expertise in addition to financial backing to the table, and often look to insert
relationships of their own into empty management roles. Whether it’s the COO,
CFO, CMO, or otherwise, establishing a relationship with the buyer during the deal
process and assuming an ownership perspective could serve to elevate a deserving
individual internally instead of opening the door for new talent.

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 3. A Seamless Transition Relies on an Informed and : 15

Involved Management Team

It’s of mutual interest to seller and buyer that the post-sale transition goes smoothly.
A company’s senior management team will be a key resource for the new owner
after the deal closes. Whether it’s a change in responsibilities, managing and hiring
more employees, striking new partnerships, or pursuing more aggressive growth
strategies such as an acquisition, the CEO and the investor or buyer involved will
need to lean on these incumbents who know the industry, have the relationships,
and are familiar with directions that have been taken in the past that will help inform
future decisions.

4. The Engagement and Investment of Your

Management Team Is an Indication of Confidence in
Your Business
A more qualitative analysis of your management team can be an invaluable exercise
when determining whether they might have a positive influence on the deal process.
Buyers often take notice of senior leaders who have spent a significant time at the
company and evaluate the contributions that have been made during their tenure,
particularly if they are pulling down a hefty salary.
Managers who have a financial stake and therefore heightened personal interest
in the success of the business are much more likely to want to see a seamless
and successful transition through. When a sale is but a twinkle in a CEO’s eye,
incentives can be put in place to encourage management team members to become
invested — both financially and personally — in the growth and long-term success
of the company.
It’s often said that culture flows from the top, and it’s true. Any company in the
midst of such a significant change puts itself at risk of disgruntled employees,
confused customers, or opening doors to competitors and lost market share.
Informing and involving your management team and effectively communicating
and managing the transition to the new owner if there is one, can help a CEO/seller
mitigate risk and better ensure the success of the company post-deal.

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 One Way Advisors Will : 16

Evaluate a CEO
By Allie Harding, Orange Kiwi
Every advisor has heard owners refer to their business as their “baby” and talk about
how they’ve sacrificed blood, sweat, and tears to make their business a success. For
many of these owners, their business is them and they are their business.
This phenomenon has a name — Role Identify Fusion (RIF) — and it is one of four
behaviors researchers believe has a direct impact on an owner’s inclination for exit.
(The other three are self awareness, work-life balance, and post-exit resilience.)
RIF is the concept of an entrepreneur’s identity as a business owner impinging
on their self-identity in their social (non-business owner) roles.
In cases where the owner’s identity is highly fused to their role as owner, answering
the question of who they are apart from the business is nearly impossible.
Not all owners develop RIF to the same degree. RIF is best conceptualized along a
continuum from a healthy self-identity separate from their role identity through
to a highly fused role-identity. Many advisors and investors will take the time in
evaluating a business to understand it’s crucial to understand a client’s degree of RIF
and how it might impact their exit inclination.
Consider two owners, both in their early sixties, both founder-owners of $30M/year
distribution businesses.
ɚɚ Steve has taken time for honest self-reflection and developed strong
relationships outside of the business. He is active in social and/or religious
circles that are not related to the business and has a close group of trusted
friends who provide candid feedback. Steve has a secure attachment style and
derives his sense of self-worth and satisfaction internally. Steve has strong
role–identity separation.relationships outside of the business. He is active in
social and/or religious circles that are not related to the business and has a
close group of trusted friends who provide candid feedback. Steve has a secure
attachment style and derives his sense of self-worth and satisfaction internally.
Steve has strong role–identity separation.

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 ɚɚ Dan has very few relationships that are not connected to the business. He : 17
reports being closer to co-workers than to family. Most of Dan’s activities
have something to do with the business or his role as CEO-owner. Even his
recreation is largely tied to the business (“golf with clients” or “junkets with
suppliers”). Dan derives his sense of self-worth externally from the accolades
of others. When asked to describe himself Dan struggles to conceptualize his
identity apart from his role. Dan is a highly fused person.
ɚɚ
Steve and Dan have both built successful businesses in the same industry and
they have both been approached numerous times to consider selling their
businesses. As an advisor, the question is: do both Steve and Dan possess
the psychological capacity to exit successfully? What might you expect to
experience when counseling Steve vs. Dan? What might an acquirer expect to
discover about the infrastructure and operations of the business?
The Steves of the world are a dream to work with. They are not afraid of engaging
in robust debate or self-reflective analysis and they are able to construct new
meaning for themselves beyond their role as owner.
As a result, they are more likely to build a dynamic management team of talented
leaders who are empowered assets that push and stretch Steve through healthy
conflict. Steve is consistently challenged to grow beyond his comfort zones and
embrace change.
As a result, Steve will approach his business exit with much less trepidation or
resistance. In fact, Steve is likely to partner with a trusted advisor to help him
navigate a thorough exploratory phase so that he is able to build both a future
beyond the business and a strategic exit plan that will make the execution phase of
the transaction a success.
The Dans of the world can be far more challenging to work with. In all likelihood
they will be unable to exit their business without a significant trigger event that
forces them to do so.
Dan may say he’s ready to exit, but his advisor will soon find that his words and
actions do not align. Dan is not being deceptive, he is simply experiencing a
discrepancy that he is unable to overcome. He knows he needs to exit and part
of him may even want to exit, but Dan is unable to develop a mental model for

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 a future that doesn’t include his role as owner. This is likely to be expressed : 18
organizationally through limited formalized systems and processes, management
teams that avoid conflict and embrace artificial harmony, a high degree of tacit
knowledge, and skills gaps.
Advisors have two options when it comes to dealing with a person who is highly or
very highly fused — the Dans of the world. The first is to run and
wait for a trigger event to force the owner to exit. The second is to know what you
are dealing with and determine what psychological assets exist that you can leverage
to help the owner through what will be a very difficult and emotional transition.

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 Resolving Conflict in the : 19

Deal Process
Even the greatest deal can be a hotbed for conflict. A lengthy timeline, financial
scrutiny, and personality dynamics can sometimes pit a CEO/seller and investor/
buyer against each other as they work out the details of the deal. The last thing
either wants, however, is for a deal to fall through for easily-avoided reasons.
To help a CEO understand and do his part to prevent transaction failure, here are
the four top reasons deals fail (and what both parties can do to prevent this
from happening). Whether you are currently engaged in a transaction or are
exploring your options, our hope is that this information will provide some insight
into some of the biggest challenges to the deal process and help you prepare now
or in the future.

Valuation
Mismatched expectations of valuation is one of the most common reasons a deal
will not be realized. Too often, CEOs and deal professionals simply cannot agree
on a price and one walks away from the table. The conflict is only natural, as sellers
want to sell their company for the most, while buyers want to make sure they are
getting the best deal.
Working with an experienced M&A advisor will significantly increase the likelihood
of a deal’s closing. Because an advisor is both interested in the seller’s success and
is well-versed in the private capital markets, it can serve as a helpful negotiator and
communicator between buyers and sellers.
It also doesn’t hurt for company owners to have a reasonable sense of market
valuations. Being mindful of a range for the company’s valuation and staying
informed on the M&A market will help reduce valuation-related conflicts.

Deal Fatigue
Selling a business is unlike any other transaction. Not only does it take longer than
any other negotiation, it has significantly higher stakes and is a full-time job. The
M&A sale and negotiation process can take at least 3-6 months — and this timeline

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 does not include the process of selecting an advisor or identifying potential buyers/ : 20
sellers, which can add at least another 6-12 months.
Many CEOs improperly prepare for the transaction and tend to underestimate the
effort that selling a business will take. As a result, they either become impatient with
the processes or burn out as they work 20 hours a day running their business and
talking to potential investors.
Deal fatigue is not often something you read about, but you will hear it from most
CEOs and investors that have been through this process. A failed transaction not
only has an impact had on one’s patience but their bottom line as well. We talked
to the CEO of a $50M+ retail company who had spent 9 months on a potential sale
transaction back in 2010 to see it fall through in the end. His 9 months away from
running the business caused him to take a 15% hit to his revenues.

Due Diligence
Due diligence is another common reason why a deal doesn’t close. The due
diligence period is the opportunity for an investor to identify any red flags and leave
no stone unturned in the business.
As a result, many investors come with a very large checklist of items to investigate.
Danny A. Davis, a leading M&A integration specialist in the UK, explained, “For each
merger, I have a list of about 6,000 items to consider. With every new deal, I add
a few items. Although deals are always different, and require different plans for
different items, we can take a somewhat standard approach to increase efficiency.”
With such expansive checklists, there are all types of risks that can cause a deal to
go south. If an investor discovers improper financials, outstanding lawsuits, cultural
issues, or any skeletons in the closet, they may opt to walk away.
Again, working with experienced M&A advisors can help a CEO make sure all the
company’s ducks are in a row.

Cultural Misalignment
Although “culture” may seem relatively amorphous when talking dollars and cents
in a negotiation, cultural misalignment can be one of the biggest red flags for both
buyers and sellers.

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 On the one hand, if an investor senses that a company has poor corporate culture : 21
or will resist post-merger changes, it could mean an unnecessarily difficult, uphill
battle. On the other hand, many retiring CEOs/owners want buyers that will respect
the culture and legacy of the business. If the two parties do not see eye-to-eye, it
does not take long for one to leave the negotiation.
As one Axial member previously told us, “If we cannot provide good evidence of
cultural alignment, the rest of the business doesn’t matter.”
To increase the likelihood of closing a successful transaction, the most important
precautions to take are hiring an quality advisor and putting time on your side.
These two strategies will help mitigate the above challenges — or any of the other
dozens that could emerge during the process.

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