Private Equity & Family Office Insights

Begin Leadership Planning During Due Diligence

Most investment theses for a construction or real estate company assume the right people will be running it. Very few diligence processes test that assumption with the same rigor applied to the backlog, the WIP schedule or the bonding capacity.

Shawn DesgrosellierOct 19, 202612-minute read

That gap is expensive. In the AlixPartners and Vardis private equity survey of 116 PE executives and portfolio company CEOs, CEO turnover was unplanned in 34% of investments, and those unplanned changes were tied to worse returns and longer hold periods. The same survey found that 64% of respondents had no suitable successor identified for the CEO, CFO or COO role.

Figure 1
The leadership risk most deal models leave out
34%

Unplanned CEO turnoverof investments saw it, tied to worse returns and longer holds

64%

No suitable successoridentified for the CEO, CFO or COO role

58%

Badly timed replacementsof CEO changes came in the two windows rated most disruptive

Source: AlixPartners and Vardis Third Annual Private Equity Survey, 116 PE executives and portfolio company CEOs.

Whether you are a private equity firm adding a platform company or a family office acquiring a business you intend to own for a generation, leadership is the variable that decides whether the model you underwrote shows up in the results.

Hiring a leader for a portfolio company should be a planned decision, not a reaction in month nine.

This article lays out how to build leadership planning and leadership assessment into due diligence so that it is.

01 ยท TimingWhy Leadership Planning Belongs in Due Diligence

Leadership decisions made after close are made under pressure, with less leverage and less information than you had before signing. Before close, you still have access to the seller, the management team is motivated to cooperate, and the purchase price, earnout and rollover terms can still reflect what you learn.

Illustrative
Figure 2. Two deals, same company: leadership planned in diligence vs. treated as a post-close problem
AFTER CLOSE Planned In diligence Marketmapped Seatdecisions Confidentialsearch Leader starts witha 90-day plan Executing the plan Reactive After close Assume the team is fine Problems surface Search startsin a crisis LOIDiligenceSigningMonth 3Month 9Month 12 Close

The AlixPartners and Vardis survey also found that PE respondents viewed the year after close and the year before exit as the most disruptive windows to replace a CEO, yet 58% of CEO replacements happened in exactly those windows. That pattern is what happens when leadership is treated as a post-close problem.

Figure 3
A five-year hold, month by month: the two windows where replacing a CEO hurts most
Year 1 Year after close Year 2 Year 3 Year 4 Year 5 Year before exit 58% of CEO replacements happened in the two highlighted years
Source: AlixPartners and Vardis survey. Five-year hold shown for illustration.
Illustrative
Figure 4. One departure, a chain of losses
Key leaderleaves Repeatclients Preconpipeline Keysuperintendents Surety andlender confidence The returnsyou underwrote

In construction and real estate the cost of getting this wrong is specific and measurable:

Illustrative
Figure 5. Four pillars under every construction and real estate thesis, and all four rest on people
The investment thesis Owner and GCrelationships Bonding andbanking Fieldleadership Founderknowledge The returns you underwrote Follow peopleUnderwritten on peopleRarely on the marketIn one or two heads

Owner and GC relationships follow people

A departing division president or chief estimator can take repeat clients, preconstruction pipeline and key superintendents with them.

Bonding and banking rely on individuals

Surety underwriters and lenders evaluate the character and track record of the people running the company, not just the balance sheet.

Field leadership is hard to replace quickly

Strong operations leaders and senior project executives in active markets are rarely on the market, and a search started in a crisis is a search with fewer options.

Founder knowledge is often undocumented

Pricing logic, subcontractor relationships and how jobs actually get won may live in one or two heads.

The goal of leadership planning in diligence is simple. By close, you should know:
01
Who will lead the business
02
What gaps exist
03
What it will take to fill them

02 ยท Hiring strategyDefine the Leader the Thesis Requires

The first leadership question is not "is the current CEO good?" It is:

The question to answer first

What does this business need its leader to do over the hold period, and who can do it?

A leader who built a $60 million regional general contractor may be the wrong person to take it to $250 million across three states.

Illustrative
Figure 6. Same company, a different job: a DFW contractor growing into three states
Loading mapโ€ฆ
Today ยท one metro, founder-led
$60M
Thesis ยท three states, institutional owner
$250M
Hypothetical company and markets, shown for illustration. State boundaries: U.S. Census Bureau.

Start by translating the investment thesis into leadership requirements:

  1. Write the value creation plan in leadership terms

    If the plan calls for geographic expansion, add-on acquisitions, a shift from hard bid to negotiated work or entry into a new sector such as data centers or multifamily, list the leadership capability each one demands.

  2. Build a role profile for each critical seat

    CEO or President, CFO, COO or VP of Operations, and the head of business development at minimum. Define the outcomes expected at 12, 24 and 36 months, not a list of generic traits.

  3. Map the external market before you need it

    Identify who in the region has done this specific job, at this scale, in this sector. Knowing the talent pool exists, what it costs and how long it takes to reach is part of underwriting the deal.

  4. Set a contingency plan for every critical seat

    For each role, decide in advance whether the plan is to retain and develop, retain with support, or recruit. Name the trigger that would move a seat from one category to another.

  5. Budget for it

    Compensation for new leaders, retention packages for incumbents, equity and incentive pools, and search costs belong in the model, not in a surprise request after close.

Illustrative
Figure 7. Step 1 in practice: from value creation lever to the seat it puts under pressure
VALUE CREATION LEVERLEADERSHIP CAPABILITY IT DEMANDSSEAT MOST EXPOSED Geographic expansionNew states and metros Add-on acquisitionsPlatform plus bolt-ons Hard bid to negotiatedA shift in how work is won New sector entryData centers, multifamily Opens offices, wins in newmarkets, recruits local leaders Integrates companies, systemsand cultures, keeps key people Owner relationships andpreconstruction-led selling Sector credibility and deliveryexperience owners will trust President / COO CEO / CFO Head of businessdevelopment COO / VP Operations
Illustrative
Figure 8. Step 2 in practice: a role profile written as outcomes, not traits
Critical seat
12 months
24 months
36 months
CEO or President
Leadership team set; value creation plan agreed with the board
Second-state operation running with a local leader in place
A team the next buyer will want to back
CFO
Monthly WIP and reporting at board standard
First add-on integrated onto one set of controls
Exit-ready financials and forecasting
COO or VP of Operations
Common project controls on every active job
Field bench deep enough to staff the expansion
Margin fade held in check at three times the volume
Head of business development
Negotiated pipeline mapped by client and sector
First wins in the new sector
Repeat client base across all three states
Figure 9 ยท Try it: set a contingency plan for each seat

Choose a plan for each critical seat to see what has to happen at each stage of the deal.

What the plan requires, stage by stage

Illustrative
Figure 10. Step 5 in practice: leadership costs belong inside the model
THE DEAL MODEL Purchase price Transaction costs Working capital Leadership planned before close Compensation for new leaders Retention packages for incumbents Equity and incentive pools Search costs NOT THIS A surprise budget request after close, made under pressure

Work done before close

ConfidentialWell timedCandidates ready by close

A search to identify talent becomes a planned process with the full market to choose from.

Work skipped

EmergencyFewer optionsWeaker leverage

The search starts in a crisis, after the leverage of the deal is gone.

03 ยท Leadership assessmentLeadership Assessment of the Current Team

An incumbent team is an asset you are buying. Assess it with the same discipline you apply to the financials, and assess the people below the top seat as carefully as the CEO.

A useful leadership assessment during diligence covers five areas:

  • Track record against stated results. Compare what leaders say they delivered with what the numbers show: fade or gain on margins, backlog conversion, cost to complete accuracy, safety record and client retention.
  • Structured interviews. Use the same questions for each leader, tied to the role profile, and probe specific jobs, decisions and failures. Ask how they would handle the growth plan you intend to fund.
  • Depth of the bench. Identify the five to ten people the business cannot afford to lose, including senior project managers, superintendents, estimators and the controller. Many of these people are not on the org chart the seller hands you.
  • Intentions and motivation. Find out who plans to stay, who expects to cash out and who is quietly hoping for a bigger role. Rollover equity and earnouts can mask a leader who is already mentally done.
  • Referencing beyond the data room. Speak with former employees, owners, architects, subcontractors and surety contacts where the deal process allows. How a leader is viewed in the market is part of what you are buying.
Illustrative
Figure 11. The org chart you are handed versus the bench you are buying
On the org chart the seller hands youCritical people often missing from it
CEO CFO COO Head of BD Senior PMs ControllerNot on seller's chart SuperintendentsNot on seller's chart Chief estimatorNot on seller's chart !!! The five to ten people the business cannot afford to lose often sit one or two levels below the top seat.

The output should be a one page view of each critical seat: keep and develop, keep with support, or replace, along with the risk of losing that person and the plan if you do.

Illustrative
Figure 12 ยท One-page seat view

VP of Operations

Incumbent, 14 years with the company, runs all field operations
Keep and developKeep with supportReplace
  • Track record against stated results
  • Structured interview vs. role profile
  • Depth of the bench below
  • Intentions and motivation
  • References beyond the data room
Risk of losing this person
MediumRollover equity, but two superintendents report only to them

Support neededA senior project executive hired below, to build the bench the expansion needs.

Trigger to recruitMargin fade on active jobs or the loss of a lead superintendent.

Plan if lostExternal market mapped in diligence; retention agreements in place for both lead superintendents.

04 ยท CompetenciesEvaluating Skills, Network, Experience and Credibility

A rรฉsumรฉ tells you where someone worked. A competency evaluation tells you whether they can do the specific job your thesis requires. For portfolio company leaders in construction and real estate, six factors matter most.

Factor
What to evaluate
Evidence to ask for
1Skills
Financial fluency, operational discipline, risk management on contracts, ability to run a P&L at the target scale
Job level margin history, how they review WIP, examples of contract terms they pushed back on
2Experience
Has done this job at this size, in this market, under similar ownership
Revenue and headcount at each stage of their career, prior PE or family office ownership, prior integrations
3NetworkHardest to replace
Relationships with owners, developers, architects, subcontractors and talent
Named repeat clients, who would follow them, who they have recruited before
4CredibilitySlowest to rebuild
Standing with the field, clients, sureties, lenders and the board
Reference calls outside the data room, tenure of their direct reports
5Leadership and culture
Ability to build a team, hold people accountable and keep good people
Retention of their teams, people they developed into bigger roles
6Owner readiness
Comfort with reporting cadence, KPIs, board governance and investor timelines
How they handled monthly reporting, budget variances and prior board relationships
Illustrative
Figure 13. Where to put the weight: network and credibility are the hardest to replace
WEIGHT HEAVILY FOR CLIENT- AND FIELD-FACING ROLES Network Credibility Experience Leadership and culture Owner readiness Skills Time to rebuild if lost FasterSlower Hard to replace Easier Harder
Easy to miss ยท 1

Network and credibility are the hardest factors to replace and the slowest to rebuild, so weight them heavily for any role that touches clients or the field.

Easy to miss ยท 2

Prior experience with institutional ownership is not a bonus. A strong operator who has only answered to a founder may struggle with the cadence and transparency a PE firm or family office expects.

05 ยท The sellerOwner Involvement After the Transaction

In most construction and real estate acquisitions, the selling owner does not disappear at close. How long they stay, what they do and how they let go has a direct effect on whether the new leadership succeeds.

Illustrative
Figure 14. A planned handoff, from signing to the end of the earnout
Founder or selling ownerIncoming leadership
Founder leads New leadership leads Founder as advisor or chairman Handoff point SigningCloseMonth 3Month 6Earnout ends Roles and decisionrights in writing Joint client, suretyand lender visits Knowledge transferdocumented Earnout pays for asuccessful handoff

Settle these questions before signing, and put the answers in writing:

  • Role and titleIs the founder staying as CEO, moving to chairman or serving as an advisor? A vague role creates two bosses in the eyes of the team and the clients.
  • DurationDefine the transition period, commonly tied to an earnout or rollover, and what ends it.
  • Decision rightsSpell out who approves bids, hires, pricing and capital spending during the transition.
  • Relationship transferIntroduce the incoming leader to key clients, sureties, lenders and subcontractors, with the founder present and visibly supportive.
  • Knowledge transferDocument how work is estimated, priced and won, and who the founder calls when a job goes sideways.
  • Incentive alignmentMake sure the earnout rewards what you need, including a successful handoff, not only short term EBITDA that a seller can manage toward.
100days after close

The AlixPartners and Vardis survey identified the first 100 days as a period prone to misalignment over:

Support expectationsTeam assessmentsPerformance metricsHow often owners and management talk

Agreeing on these points before close removes most of that friction.

06 ยท Ownership modelFamily Office vs. PE Firm: How Leadership Strategy Differs

The principles are the same, but the hold period and governance model change what you are hiring for.

Illustrative
Figure 15. Two horizons, two kinds of leader
PE firm Defined hold Several years Planned exit Next buyer's diligence on the team Family office Long-term owner Often indefinite or multigenerational ยท leader often expected to stay a decade or more Close~5 yrs10 yrs15+ yrsNext generation
Consideration
PE firm portfolio company
Family office portfolio company
1Typical horizon
Defined hold, usually several years, with a planned exit
Often indefinite or multigenerational
2Leader profile
Proven at scaling to a target, comfortable with a defined exit and buyer diligence
Steward and builder, values long term culture, often expected to stay a decade or more
3Incentives
Equity tied to exit value, performance against the value creation plan
Long term incentives, profit sharing, phantom equity, fewer exit-driven payouts
4Governance
Active board, operating partners, frequent KPI reporting
Lighter board, close relationship with family principals, fewer layers
5Main leadership risk
Leader not built for the pace or the exit timeline
Leader not aligned with the family's values or decision style

Hiring for a PE firm

Find someone who has executed a value creation plan before and understands what the next buyer will diligence.

Hiring for a family office

Find someone trusted to run the business the way the family would, without the family running it day to day. That fit is harder to assess and deserves more time.

07 ยท The frameworkA Leadership Planning Framework for the Deal Timeline

Leadership strategy works best when it runs alongside financial, legal and operational diligence, with clear outputs at each stage.

Illustrative
Figure 16. Leadership is the one workstream that runs from LOI to exit
1 ยท Beforethe LOI 2 ยท Confirmatorydiligence 3 ยท Signingto close 4 ยท First100 days 5 ยท Throughthe hold FinancialLegalOperational Leadership CLOSE Thesis to seatsSeat decisionsCandidates by close90-day plansSuccessors named
  1. STAGE 1Before the LOI
    • Translate the investment thesis into the leadership capability it requires.
    • Run an initial read on the CEO and the two or three seats that drive value.
    • Map the external talent market for the roles most likely to need change.
  2. STAGE 2During confirmatory diligence
    • Complete structured interviews and referencing for every critical seat.
    • Identify the bench of key employees below the leadership team.
    • Decide keep and develop, keep with support, or recruit for each seat.
    • Build compensation, retention and search costs into the model.
  3. STAGE 3Between signing and close
    • Negotiate founder role, duration, decision rights and earnout terms.
    • Put retention agreements in place for key employees.
    • Begin a confidential search for any seat marked recruit, so candidates are identified by close.
  4. STAGE 4First 100 days
    • Agree on KPIs, reporting cadence and board rhythm with the leadership team.
    • Execute the relationship and knowledge transfer plan with the founder.
    • Onboard new leaders with a defined 90 day plan and a named owner sponsor.
  5. STAGE 5Through the hold period
    • Review each critical seat at least annually against the role profile.
    • Keep a named successor, internal or external, for the CEO, CFO and COO.
    • Before exit, confirm the leadership team is one the next buyer will want to back.

08 ยท ConclusionThe Return Depends on the Operators

A disciplined investor would never close without understanding the backlog, the contracts and the balance sheet. The people running the business deserve the same scrutiny, and the same planning.

Leadership assessment and a clear hiring strategy, started in due diligence, turn the biggest unknown in the deal into a managed part of the plan.

How we helpA Second View on the Leadership Side

Vitality Group works exclusively in construction and real estate, with particular depth in Texas and Northern California. We help private equity firms and family offices assess incumbent leadership, define the operators their thesis requires and identify the right leaders for their portfolio companies, often before the deal closes.

Construction and real estate leadership, with particular depth in Texas and Northern California
Loading mapโ€ฆ
Shaded: Texas and the Northern California counties. State and county boundaries: U.S. Census Bureau.

Assess incumbent leadership

Structured interviews and referencing beyond the data room, for the top seat and the bench below it.

Define the operators the thesis requires

Role profiles written as outcomes at 12, 24 and 36 months, tied to the value creation plan.

Identify leaders, confidentially

Market maps and confidential searches that can start before close, so candidates are ready when you are.

If you are evaluating an acquisition and want a second view on the leadership side, we are glad to talk. Contact Vitality Group or call 214-259-9200.

Evaluating an acquisition?

Know who will lead the business before you close.

Speak confidentially with Vitality Group about the leadership side of your deal or call 214-259-9200.

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