Episode #28: The People Problem in Private Equity Value Creation w/Meg Poag

Host: The Lab takes the ethereal to the practical. Our, uh, podcast acts like a business school case study for private equity professionals, CEOs, operating partners, and chief transformational officers. We all know transformation is the key to differentiated alpha. Uh, here's how you actually do it. Our audience tunes in to learn from those in the field getting their fingernails dirty and driving meaningful growth through, through better operations, technology and data. We learned from going to business school, teaching at business schools, and applying these lessons in the real world that case studies actually help the insight stick better. Come join us.

Scott: All right, welcome to the next episode of the Lab Podcast. Super excited to have Meg with us today. You know, as we all know, we started this podcast to be a sort of a business school case study on, gosh, I wish I could benefit from someone else's stubbing of their toe or lessons learned so I can avoid some of those same pain points myself. This is a topic that's super, uh, near and dear to my heart. Our hearts is like, you know, it's one of the classes that teach up at Columbia business school at 2/3 of M and A transactions destroy value. What are we all doing? So that's why we're excited to have Meg, because she's going to solve all of these problems today for everyone that's listening. But let's maybe take a half a step back before we get into the weeds here. Meg, walk us through how you got to this point and how you're helping a lot of clients we all work with solve some of these problems about making sure that you're being thoughtful about that value creation journey.

Meg Poag: Yeah, yeah. So I was CEO, loved the business side of things, love creating strategy, vision, KPIs and that. I found that that was not what was slowing me down or frustrating me. It was the people side of things. Right. And so I became obsessed with understanding organizational psychology, what creates a bad boss, emotional intelligence stuff, and even neuroscience. And to try and figure out why do people do such dysfunctional things? Why can't a business just be a business and everyone lines up and does what they're supposed to do. Well, that doesn't happen that much. So I ended up creating Mission Squared about nine years ago. My consulting, uh, firm. We do a lot of executive coaching, advising particularly on the people side of things, on, um, cultural friction and understanding the nature of emotion and how it's impacting your business results.

Scott: Yeah, well, those, I mean, it's easy to make things look pretty in Excel. Just make assumptions. It's hard to execute in the day to day so you know, when we think about some of the things that can go wrong, right. I would argue that, you know, private equity firms and professionals that work there, they're doing thousands and thousands of deals. If you're an operator, maybe you're doing several deals. And so from a volume standpoint, an entrepreneur and owner doesn't have as much volume to sort of think, to utilize in a reference as they're making decisions. This is their business that they built or you know, their family built or you know, that they're running. Right. So before we get into some of the, you know, the things in the proverbial, the paradox, what are, you know, when you sit down with someone who's going to go through a transaction, what do you say to them? To say, I don't have all the answers to life, but here are some things you should think about before you go down the path of selling your business.

Meg Poag: I mean I think people get very excited when they're looking at uh, offers to sell their business and at ah, partnerships that could lead to more like I'm gonna, we're gonna join forces, we're gonna use, you know, let's say I'm the business owner, we're gonna take my brilliant business model and I'm gonna work with you and we're gonna acquire more companies just like this and make them all better. And I'm gonna have equity. And this is like their eyes get real big, right? This seems like a real shiny, exciting deal. The thing about emotions is negative emotion or positive emotion makes us stupider. Like the more excited you get or the more pissed off you get, the lower your IQ gets, you start to get tunnel vision. You're not thinking clearly, you're not looking into the complexity our brains like certainty and making things black and white. So I would tell them, don't get so excited, right? It's like you're dating because that's what you're doing. You're getting into a major relationship. Would you just go, oh, wow. You know, he's cute. Seems like he's got money and we have fun together. It's been a fun month, let's get married. No, you got like poke around in there. What are his little quirks? Does he leave his toothbrush out? Do you guys actually want the same number of kids? How much growth do you want? Right? Like do you have aligned visions? Do you have similar values that you can use to make decisions from. Just look at the boring stuff, the not sexy stuff and um, be more realistic. Are you really ready for this? Because you don't know what you don't know about them, but they also don't really know your company. Right. And if, if you're not really prepared and open about what's going on under the covers in your company. Right. And that firm is not asking and they don't even know what to ask. And you also aren't thinking critically about what, how could this go bad. Right. Let's anticipate that. Let's talk about it up front. But people don't like to do that when they're dating. M. Right. My match.com profile didn't say I have a bad temper.

Host: No. People don't want to say no either. Right. Especially when you said when there's that excitement, that arousal, um, of oh, this could go and this could be life changing money. Right. But that's going to take life changing changes. Expectation is a thief of joy is something I always think of. And it's like kind of a pessimistic way of looking at the world. But also what I hear in folks in your seat are a lot of times the questions, some of the most simple questions aren't asked upfront. Uh, in that diligence process. Right. Like the, the word culture I feel like I've heard a billion times at this point. But, but where do you see the potential breakdown in, in that diligence phase on both sides? Because I'm assuming PE gets in bed with some of these folks as well and go, oh, this is not the management team I had by my.

Meg Poag: Yeah, like a bad marriage can go both ways. We can both realize we're in it or only one person feels like it's a bad marriage. So, and I, you know, I created this acquisition paradox to look at what are the points at which it breaks down. I, I, I see themes with the problems that come up. And I realized it's not just themes. It's actually kind of a cascade where it starts with a lot of confusion where in the due diligence process we're not really clear about who will get to make what kinds of decisions. Right. Ultimately, who has the authority and when are we going to have to have consensus on things? And when are you going to pull your card and say, I get to make this decision? That's a yucky conversation to have. Right. So then post acquisition power and authority structures are unclear and the owners may resist decisions that they no longer have the authority to override. The PE firm might be wanting to make a decision without fully understanding what the impact is going to be. And Then that leads to that culture clash. And when I say a culture, I mean it's the mindsets and habits and attitudes that we bring to decision making. And when you have a culture of the acquired company, that's a certain way. It's built more on long term thinking, empowering people, having strong relationships. And then the culture of the PE firm comes in. It's data driven, it's fast paced, it's no, we need to cut costs, we need to. Right? There's a clash that creates a lot of insecurity with the leadership team in particular. They no longer know who's in charge, they no longer understand what we're doing. They're looking at what's this going to mean for me? Is my head going to roll? Is you know, are they going to make me fire some of my team members that I'm best friends with now because we've been working together for 15 years? And then that insecurity starts the collapse, right? That threat response that people get where they're uncertain and any uncertainty in the human brain is seen as a threat. So your amygdala is going to fire just like you're being attacked by a bear just because you don't know what's going to happen. Right? And a lot of people don't have the self regulation and self management skills to deal with that. Trust gets eroded. And we are the worst. Our interactions are characterized more by alienation and dysfunction. We're not sharing information openly, we're disagreeing when we don't need to. Then there's that drag, the friction, inefficiency. It just becomes this death spiral was

Scott: one of the questions about, I mean so many things in life are about self awareness, uh, which we all have delusional senses of our ability sometimes and whatnot. But uh, what I'm listening to you say, and what we've seen time and time again is uh, an owner needs to be aware, meaning do I want to keep running this thing or do I want to sell and walk away and do I really know which I want to do or do I just want to make some money but still run it? And oh, by the way, those are all possible. You just need to be clear about what you want because then you can find different partners, whether it's someone who takes over from a control standpoint, someone who is more of a growth capital provider where you still run it. So part of it is just making sure that you as an owner are honest with what you want to do. And perhaps that's since you Maybe you haven't done, as we said earlier, thousands of MA transactions, having the ability to ask people. I think maybe this is what you're doing often and what you do with friends and board members and whatnot. I think I want to do this. What are the ramifications of that? If I sell, is this private equity firm going to help me do things that I can't do on my own? Have they seen more movies than me? Am I going to make more money on the second bite of the apple than the first bite of the apple? Because I'm allowed to sort of grow in a more thoughtful way. So, you know, if someone hasn't been through that, is that really what you're spending time thinking about? The authority gap, the culture crash, the threat response, the things that people just need to get out ahead of and be okay if, if it's not an absolute clarity yet, you need to scratch some of those things a little bit before you're having your conversation with, uh, with a new art.

Meg Poag: Yeah. And Scott, you actually started this by talking about people's self awareness, right? And, and when you're not aware of what your actual priorities and needs are in advance, then when you're, when all the confusion hits and the authority, the misalignment, right? Then you're going into a threat response and, and your body is reacting, you're releasing tons of cortisol, you're getting stupider, you're getting more stressed, and then you can't even think, what is most important to me right now? What is the big picture? So I try and start there and say, well, what do you really want? Let's be honest, right? And if, if there's trade offs, which there will be, what do you want the trade off to ultimately look like for you is, is this about, do you want to really stay involved with this company because you love it? Are you just clinging to that baby and not wanting to share custody? Right. And what are you really great at? Because you're not great at everything. And you might put yourself in a new scenario and realize, oh, um, I'm not actually very good at going into another company with this PE firm and helping to coach those leaders to do their business better. I don't like doing that. I don't like coaching other people. I don't like partnering. I'm a lone wolf. Well, figure that out in advance. If you're a lone wolf, go do your thing, but don't pretend that you're going to be in this partnership that you're not comfortable with.

Host: Yeah, from the P side of the house. I mean uh, talking to a buyer with that level of clarity has to be so much easier for them. Right? I mean there are some firms that are just all about we want to buy that. We want a founder led business. We want someone who wants to hold this thing for three to five years and exit with us. There's others that are very, very comfortable with, we're going to buy your company, we're going to replace it with someone who we know and trust and it's going to be great. So I think is quickly as that that seller can really come to grips with. What do you want? Define it and then let's go find the partners that work for this. Right?

Meg Poag: Yeah, yeah. And most of them haven't thought about their options because they don't even know or understand the implications of those options. And so they need to be clear about their vision for their future, their values and, and really what their needs are. All negative emotion and threat comes from your needs being threatened or unmet. All negative emotion for all humans. And if you don't even, you didn't anticipate what your needs were, then the emotions hit and the threat response and you're not even sure why, you're not even clear about what you would need to feel better.

Scott: Well, so how do we then? I think a rational mind, maybe I'm delusional, but they'll agree with everything that we all just said, right? Because it's pretty straightforward. The question is, well, it was so easy. Let's go back to 2/3. M& A transactions destroy value. And arguably there's some pretty smart humans that are involved in these M and A transactions that are destroying value. So then it becomes all right, how about you sort of stuff one less time. So to do that, one solution may be, I think uh, a very inexpensive solution because it's not big cash dollars are independent board directors. So you think about independent board directors often at big public companies or PD backed assets and. But the argument can be if you're a founder owned business with 2, 3, 4, 5 of EBITDA, let alone 10, 20, 30, 50 of EBITDA, that can be a pretty meaningful ally for you because a founder, CEO owner is a lonely job. You look around and you're like, maybe you have family members being here, but maybe you don't, maybe you have a good conciliatory or confidant with you. Maybe you do, maybe you don't. So how do you think about that? Because you're coming in and helping These companies get ready for this.

Meg Poag: How?

Host: How?

Scott: If independent board director is a not the only solution, but one of a handful of things you could do, how do you figure out which of those people are best for you? Because it may not be your buddy, who at your country club or whose kids go to school with your kids or you lose your neighbor. How do you think through that?

Meg Poag: M. All right, I'm going to geek out on a little bit of psychology, but I promise it's going to be a pleasant amount psychology. So, um, I don't know if y' all have noticed this, but founders tend to be psychological outliers. People who start companies are different. They're a different brand of a person. Right. They have different psychological makeup and drives. They usually have a very high drive to be in control and they have a high drive to want to influence everything. They have a very low drive to receive guidance. In fact, they don't like guidance, advice or support. Right. They. They almost buck against it. They won't even see the opportunity to get it. They also often outrun their punk coverage. As my executive coach told me I was doing, you're out running your punk coverage. You get so excited, you run out there and then you turn around and go, whoops, no one's with me. Right. So you're putting this person at the helm of the decision making when they already don't like or want input from anyone else. And so that's where we got to have that self awareness. To say I have some gaps. I can't. I don't have full visibility into this. My perspective is limited and I need to slow down and not only get advice and input from other people who know me and my business, but I also need to engage my leadership team in co creating this vision for the change and growth. If I'm actually going to do this, then I've got to get them on board. I cannot run my punk coverage. I've got to engage them. Um, because if it's. If they're not part of the idea and it's not their idea, they're going to resist it. Right? And if I'm not getting good advice and support on what to be asking this firm and talking about during due diligence, right, Then I'm just going to be running out there blind and agreeing to things that I didn't want to agree to. So I need advisors, but I also need my linebackers. And, you know, I gotta have my whole team with me and around me and I need to be listening. And that's Just not how they're wired.

Scott: Well, we must be doing the NFL sort of draft is happening last night and tonight where all of us, if you're an NFL fan, you're delusionally positive. But this year it's going to be amazing.

Host: Right.

Scott: This is the one.

Meg Poag: Uh, we're Dolphins fans, so we get to have that every other year.

Scott: Yeah, well, it's peak year. Yeah. The beauty of sport is by definition, most people are wildly frustrated at the end of the season.

Meg Poag: Yeah.

Scott: Yes. Their team didn't make it.

Meg Poag: I mean, um, look at psychology. Like in, um, in soccer, when something goes wrong on the field and the ref makes a call, the, the fans of the team that the call is made against are always going to think it's an unfair call. But if the exact same play happens five minutes later and the call again goes for them and against the other team, they're going to think it's the right call. We have this bias, right. That we are right. We have a bias that we can see everything and that need to be right is one of the biggest trip ups in decision making. It's like, I see everything. I'm all right, I'm good. Everything's going to go my way. And that optimism, optimism is not good in business. Right. We don't want to have a business plan that relies on hope and positivity.

Host: Well, it probably is to a certain extent. Right. But blind optimism is dangerous. But you know, a lot of these founders, they, they get there by waking up every morning and being excited. But then to your point, it. When it's, it's such an event that that sale is such a big change that so many aren't prepared.

Scott: Prepared for.

Host: Right. And then you got this PE firm who. That's all they do. So it's, it's a, uh, it's a stacked deck in a lot of cases. So it's an interesting perspective.

Meg Poag: It's like you're getting into a marriage, but maybe you're a little country girl who only knows a few happy families and you're about to marry a big city boy who's got lots of community and lots of visibility into all the different ways this could work. That city boy is going to win out on how this marriage should go.

Scott: Yeah, I loved your point. Also around like some of the best executives that we've worked with and invested in and co invested into these deals are. Will say these are super smart people. Will say I need to hire people that are smarter than me in different areas of the business. To your point, earlier, like out running your punk coverage, which is a good analogy. You can't be the smartest in the room always as you continue to grow. And that's what you need to do for your own teams. That's what the PE firm, the good ones are supposed to be able to do for you, is see more movies. So it all comes back to your point earlier. Like it. Okay, if we all think that's logical, then how do you get either yourself, if it's you, or you know, someone that you know in your ecosystem that you're trying to help to be more self aware? The worst thing in the world is to go to someone who's unselfaware and say, guess what? You're not self aware. Like, oh, uh, great.

Meg Poag: Oh, I do that every other day.

Scott: That's why you're on this podcast. So how do we solve that problem? Because we all know those people. And by the way, some of those people may be us. But how do you maybe solve is too grand, but how do you chip away at that shortcoming?

Meg Poag: Yeah. So think about when you were unaware of a trait or a little quirk you had. How did you become aware of it? It's feedback.

Scott: Mhm.

Meg Poag: Right. We need feedback. And when you have been the founder and CEO for 20 years, I guarantee no one wants to give you feedback. And you're probably not asking for it. Right. It's a whole habit shift. So I mean I use an assessment called the Iris that, that measures the most predictive behaviors of how you're going to do in a leadership role in a company. And most of it is emotional intelligence related. Can you handle conflict? Are you aware of the dynamics impacting a team? Are you aware of your own drives and needs? And are you managing your emotions so they don't impact your choices? That IRIS assessment, and it's created for coaches, it's uh, to help you grow and become more aware. So I show people, here's what you look like in all these different traits and here's what I predict your behavioral trends are and how other people are seeing those behaviors. Is that optimal for you? Right. And then they may say, well it's not true. I'll say, okay, let's go ask some people, let's go get specific feedback about how you're being perceived. Right. And the, the precursor to awareness is care. I have to care about something to be aware. And so all you have to do, Scott, is say, look, you're, you're kind of unaware of this, but I know you care about X and if we develop this, it'll help you get to X. So I'm really a salesperson for people to grow up, wake up and start doing different things by realizing how it connects to what they do care about.

Scott: Yeah, well, to what else are good friends are supposed to be able to do is be able to be aware and dig into that. So. But you know, to your point earlier, most of the many founders may say, why are you here? What are you getting out of this? How am I going to get sort of the short end of the stick here? And you know, maybe that's a bridge too far at the moment, but you gotta find the ones that are, you know, beginning to lean in and desirous of being, you know, curious mind and being self aware.

Meg Poag: Yeah. And you know, the research has shown that teams and companies can get through incredible adversity if they feel connected and have a high level of trust. So focus on the relationships. Right. Uh, make sure that your team trusts you, that you're building trust with the private equity firm, that you're building trust amongst the leadership team and the leadership team with the firm. And in order to build trust we have to have clear expectations because trust is eroded when you're not doing what I expect of you and a situation that's a brand new marriage. Right. We're going to do a lot of things that we didn't expect of each other. Like I didn't realize that you don't pick up after yourself and you expect me to make dinner. Well, that's not going to work for me. We need to realign on expectations so that we can maintain the stability of those relationships and then we can get through anything.

Scott: So maybe there's a new business line in Match or Bumble or I don't know, whatever the various, you know, sort of ways you can do that is, is professional awareness. Right. Then you can, you know, it'd be a lot more interesting that way you can get into a relationship, you get into a business like are you aware? I don't know, maybe that's a lost leader.

Meg Poag: People don't really want to be aware, Scott. They want to be successful. See if, to help them, to see how awareness will help them be more successful.

Host: I was going to ask you that as a parting shot. So I know we're kind of, we're, we're kind of beating up on the ego of folks in some capacity here. Kind of talking about a lot of people don't want feedback, but your business seems to be thriving so people are, are coming to you with an open mind. I mean, are you getting calls from CEOs to say I need to be better? Are you getting calls from, from boards and, and advisors who said this, this person needs help? Like how are you engaging?

Meg Poag: Yeah. So it, it's kind of ironic, Nick. What I, I'll get uh, a call from a CEO or a COO that says fix my leadership team or uh, help me fix this culture. It's go. People are inefficient, they complain too much. Right. And I'll say, great, let's come in and assess what's going on and guess what part of the assessment is you.

Host: Yes.

Meg Poag: Right. But no, it's. I think we all know that we have some blind spots and if you approach it from a place of generosity and say, like I have my blind spots to you, we're still going to get this done because I want you to win. Right. And so I'm as invested in you and your team winning and in order to do that we're going to have to make some shifts and I can help you understand where some of your deficits are and how to very quickly shift out of them. It's not going to take that much work or time. So, um, just helping people have, see the hope and that the yucky prickly part of personal awareness and growth is worth it because you're going to win. You're going to be more successful.

Scott: Yeah. Having uncomfortable conversations are actually good because you just get through them. And yeah, when you're someone like Nick or me, there's lots of shortcomings. So it's helpful to have those conversations and that's why we're just thankful to have you on the podcast. I appreciate you joining us today and I think you really are. You know, it's a herculean task to uh, sort of have people be more self aware, but those that are, that would find it helpful and maybe to your point, come with the solution, fixing their team and oh, by the way, maybe that fixes part of their own issues. I think we've seen it work well with clients. We think you're doing a great job and so thanks for sharing a little bit about what you're doing, you know, with us in the, in the audience. And I'm looking forward to uh, a subsequent or follow up podcast when you can tell us all the new problems you solved one by one from these folks. So thank, thanks for joining us.

Meg Poag: Awesome. It's been my pleasure. Thank you.

Host: Thanks man.