"Hiring “Out of the Box” = “Out of Business"
11/17/23 Edition Stephen Says Column

Dear Stephen,

Several years ago, our company, which makes a unique product sold within the contract furniture space, was acquired by private equity. The original founders bolted and immediately PE brought in a CEO from outside the industry to help grow revenue, cut costs, and prepare us for eventual resale.  That was 3 CEOs ago! 

Ironically, my wife works on the residential side of the business for a major residential trade showroom that sells furniture and textiles.  Her company was also sold to PE.  The owners still dabble in the brand, but ultimately it’s the same story – they get the payout and they just drift away.  PE loves what the founders of these brands created but it seems they believe the original owners cannot grow or manage the business and so they hire an “outside the box” CEO.  Almost always Ivy League pedigree. 

I wonder if the founders of these companies are sad that the entity they spent their lives building is now going down the drain; or is the money they received enough to overcome the doubts they must feel?

Me and my wife live in the Southwest, but this is happening everywhere in our industry.  I just saw this with all those unfortunate people losing their jobs at #MitchellGold+BobWilliams in North Carolina. Their story is heartbreaking – a revolving door of leadership and salespeople until they went out of business.  And I fear that high interest rates will accelerate doomsday scenarios from PE owned companies like #MitchellGold.

During the pandemic residential brands flourished, and PE and even non-private equity such as other manufacturers were lining up to buy companies.  #Haworth is the best example of a non-PE company that must be happy they invested in luxury residential, pre-pandemic.  They must have made a bundle while contract was in the tank. Haworth is one furniture manufacturer buying another, so they know what they’re doing and have a big advantage over PE.  Same goes for Herman Miller acquiring Knoll.

My observation is that smug PE partners hire “outside the box” executives in leadership who may understand a balance sheet, but do not have a clue as to the customers or how our salespeople work in the contract or residential business.  What do you think?  What does the future hold for leadership in these acquired companies?  Will buyers learn the best way to manage them, or will we see more of what happened at Mitchell Gold? 

Will the investors ever hire from within the industry they are so interested in buying into, or do they look down on the executives from the very industry they are investing in?

Inside the Box
Dear Box Insider,

I am familiar with the developments in our industry that you describe,  especially the distinction between when PE purchases a furniture company as opposed to one furniture company buying another. 

So if Steelcase, Haworth, HNI, or OFS buys a company that you work for, count your blessings. The companies I mention (and others) have leadership that appreciates the heritage of our industry and not always, but mostly, they respect industry veterans in leadership.  On the other hand when PE acquires a company there’s usually a culling of senior managers, kind of throwing the baby out with the water, as the saying goes.

Yes, these outside CEOs are smart people, no doubt about it, and often it is time for a change in leadership. Afterall this industry is not brain surgery and I firmly believe that we should bring in more people from the outside.  Yet transition is tricky because when it starts with the CEO, it usually moves to the VP of Sales hired from the outside, and next the salespeople. My experience is that this happens because outsiders feel more comfortable with other outsiders. It is sort of an “equalizer”, yet it turns out that all these outsiders can hurt morale, culture and revenue. 

Just because someone has an MBA doesn’t mean they can jump into our quirky industry and get immediate results. Our industry is built on creative geniuses like #HollyHunt, #JerryHaworth and #FlorenceKnoll.  They have a brilliant idea or design and customers respond and they grow their brand.

Here is an example of what an “outsider” CEO has to deal with. Both residential and contract manufacturers have many “customer” groups to understand:  in residential it could be the homeowner and the decorator and the designer; in contract it could be the end-user; project managers; builders/contractors; architects, interior designers; sales staff; independent rep firms and contract dealers. And folks, they do not teach this at Harvard!

So knowing IBITDA is important, but knowing how to motivate a designer showroom or an independent rep group who are not your employees is quite another story.  And understanding the complex distribution network and discounting policies (50/10/5/3 plus freight – what are you talking about??) just takes time to learn.

So, getting back to your questions about these companies hiring leadership in this environment, I can answer from personal experience because our firm often serves as their recruiting resource. 

It’s a challenge; we have adapted to the changing requirements, but we haven’t changed our basic values – we find the candidate whose attitude, experience and skill set closely matches the job description, resulting in career advancement for the candidate and in a new, productive employee for our client.  That approach would be my recommendation to anyone hiring – whether it’s “in the box or “out of the box”.