Hi, it's CJ Gustafson and welcome to Looking for Leverage.

Today's theme: the team upgrade. Somewhere in your first year at a PE-backed company, you're going to be expected to replace and upgrade some of the people you inherited, including ones who are loyal, hardworking, and have the processes required to run the business in their heads. And you're expected to do it well, even though no finance training on earth prepares you for it (an MBA has a full semester on derivatives and zero minutes on how to tell a competent person their role outgrew them).

Eight months into the hold, my operating partner was walking the org chart on a talent assessment deck the sponsor had paid a firm to build (it would shock you as to how much these studies can fetch). He stopped on my controller. Call her Dana. Eleven years with the company, closed every month on time, the person everyone went to when they couldn't find a number. He tapped her box and asked, "Is Dana the controller for the company you're going to build, or the controller for the company you bought?" I started to answer and realized the question wasn't really about Dana.

You already know PE firms upgrade management teams. It's in every article about how private equity works, usually framed as the villain move where the new owners show up and clean house, including all the loyal siblings and childhood friends of the founder. The concept doesn't need a ton of explaining: some of the people who got the company here aren't the people who take it to exit, and your job is to figure out who belongs on the bus. However, knowing that in the abstract does pretty much nothing to prepare you for doing it to a specific person whose coffee order you know.

This article won't be able to cover the ENTIRE process and do it justice. But here are the layers you'll have to work through:

The assessment is happening whether or not you run it. Most sponsors commission a talent assessment early in the hold, sometimes a firm like ghSMART, sometimes an in-house talent partner who's done this across thirty portfolios (with domain specific expertise to dig deep in a department, like engineering). Your team gets mapped, often onto a nine-box or an A/B/C grade. And the same lens grading your VP of Sales is grading you (you are absolutely not excluded from this process — as the CFO you are not only graded on your fit at the company, but stack ranked within the investor's portfolio against others doing your job somewhere else). Ironically, there's also a good chance that you're in your current role because they replaced (upgraded) the CFO spot already.

The hard calls aren't the obvious ones. A clear underperformer is easy, and honestly a relief to many within the company. I've seen this go down before where no one is arguing that the person is "good" but they are vocal that the person "has been here for a long time," "helped the company get to where it is today," "bleeds [fill in the color of your company's logo]." But once again, not arguing they are great at their role.

The ones that keep you up are the competent people who were good for the company you bought, and you may even hire them if the company were smaller, but show indications of not scaling. An example could be Dana, who ran a clean close that took 16 days at $30M of revenue but has never built the function a $200M company needs. I'm talking about the 6 out of 10 in a seat that now demands a 9 or higher. You can see the weight of the org eventually overtaking her (and her manual processes), and slowing everyone down.

The cost of bad timing runs both directions. Move too fast and you burn institutional knowledge, spook the people you're keeping, and roll the dice on an external senior hire, who washes out something like four times in ten. This is even a more difficult move if the person is external facing — let's say they are the one who personally reaches out to your largest customer's CFO each quarter for payment. There's a web of relationships underpinning many of the processes the company completes (as slow as they may be).

Move too slow and the gap compounds, the function keeps running a step behind the plan, and the question in the operating partner's head migrates to if YOU can do your job right. And to complicate things, you need to make sure that the person you hire is obvious on day one to the people who did stay on board as to why they are a better fit than Dana.

Reframe to be future looking. "Is this person good enough" is a referendum on their worth, and it's almost impossible to answer without emotions, because the honest answer is usually "yes, but." The better question (for better or worse) is colder and much more objective. Scope the role for the next twenty-four months first, on its own, as if the seat were vacant. Then ask whether the person in it can grow into that scope on the timeline the plan actually requires. As a CHRO I worked with liked to say "we hire for the role, not the person." Sometimes the answer is yes, with development and air cover. If so, it's your job as a manager to help get them there. Sometimes it's no, and you've at least moved the decision off the person's character and onto the fit between a role and the shot clock.

Say you've got a VP whose role has outgrown them at a $75M revenue company. Here's the number that makes you hesitate (not weighting the personal discomfort).

Call it $275K of hard cost and two quarters of transition drag before the new hire delivers a dollar of upside.

The second number is much harder to calculate.

Let's say your value creation plan assumes revenue grows from $75M to about $108M over a three-year hold, roughly 13% a year, and sales leadership is the single biggest lever under it.

Suppose the adequate VP delivers 9% instead. That's what they've been doing for the last two years. Now, you can't pin the whole gap on one person and you shouldn't try. But directionally, three years of 9% gets you to about $97M instead of $108M.

Another way to think of it is the opportunity cost of $11M of revenue missing at exit. At a 25% incremental margin and a 10x multiple, the enterprise value at stake runs into the tens of millions. While difficult to get to a hard number, any way you slice it, upgrading this role has 8 digits attached to it.

I waited too long once. Not on Dana, on someone else, a director who'd been with the company since before I arrived and who I liked enormously. I kept telling myself he was "developing," which was true, just not at the speed we needed. I gave it another quarter. Then another. What finally moved me wasn't the operating partner pushing. It was another CFO, a few years ahead of me, who listened to me agonize and said, "You're not deciding whether he's a good person. You decided that already. You're deciding whether you're going to keep paying for the gap with the rest of the team's time."

What I'd been calling loyalty and hope in someone's ability to scale was mostly me avoiding an uncomfortable conversation. It was actually selfish.

When I finally made the move, I did it with a long runway and generous severance, and he landed somewhere that fit him better. The cost of waiting was paid by my team, who developed resentment towards their co worker who was making their days longer, and a reduction in faith that I could guide them effectively.

Three things, and none of them is a firing.

Wishing you clarity in team vision and communication,

CJ

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