If we had to pick a single decision that drives the dispersion between our best investments and our average ones, it wouldn't be entry price, leverage structure, or market timing. It's who runs the business after we own it.
The bottom-quartile outcomes in our portfolio share almost nothing in common except this: we got the operator wrong. The top-quartile outcomes share almost nothing in common except this: we got the operator right. That correlation is so durable across markets, sectors, and cycles that we treat operator selection as the most leveraged decision a sponsor makes, period.
Three categories, and we're rarely indifferent between them
When we take ownership of a small business, there are three paths on the operator question:
- Retain the existing operator — usually the seller, sometimes a long-tenured GM
- Promote from within — elevate a #2 who's been ready for the seat
- Hire externally — bring in a new CEO or GM
The default assumption in most search-fund and lower-middle-market PE playbooks is path 3 — the financially-trained operator hired into a business they don't know. We think that's the worst of the three options unless the existing situation is broken.
Path 1 — retain — is dramatically underrated. The departing owner-operator, in many cases, is willing to stay on for 12–36 months if the structure is right and the deal isn't a hostile transition. They know every customer, every employee tenure milestone, every quirk of the cost structure. The retention bonus is dramatically cheaper than a misfire on an outside CEO.
What we test for
When we are hiring — whether from inside or outside — we test for a handful of traits in priority order.
1. They can name their own past mistakes specifically
Every candidate has a story about a mistake. The discriminating signal is the specificity. "I learned to delegate better" is not a real answer. "I held onto the comp redesign for six months past when I should have launched it, the sales team disengaged in Q2, and we lost two reps to a competitor that did launch its plan" is a real answer.
The candidates who can describe their mistakes at that level of detail tend to be the ones who learn from them. The candidates who can't — even when prompted three times — tend to repeat them.
2. They've operated through at least one period of contraction
Growth covers a lot of operational sins. The operators we have the most confidence in are the ones who've had to make the call to reduce headcount, exit a product line, or wind down a customer relationship for the long-term health of the business. We don't need them to have done it gracefully — we want to hear them describe the specific tradeoffs and what they'd do differently.
If a candidate's entire operating history is in growth environments, we underwrite a learning curve. That isn't disqualifying, but the price needs to reflect it.
How a candidate talks about employees who left under their watch — voluntarily or otherwise — tells you almost everything about how they'll handle conflict in your business. Listen for empathy and accountability in equal measure.
3. They have a working hypothesis about the business within 60 days
We give every operator candidate a take-home exercise: read our IC memo, read the prior owner's pitchbook, then come back in two weeks with a one-page answer to the question "What would you do in your first ninety days?"
What we're looking for isn't the right answer. We're looking for an answer that's specific, sequenced, and willing to be wrong. The candidates who write generic playbooks ("install KPIs, hire a controller, optimize the sales funnel") aren't ready to operate this specific business. The candidates who write something pointed and possibly wrong — "I think the pricing on Service Line C is anchored too low and I'd test a 15% increase on new customers in month two" — are.
4. References that go three layers deep
Anyone can find three references who will say nice things. We ask for an unusual structure: name three people who would say something hard about you, then name three people I would talk to if I wanted to understand how you handled the worst quarter of your last role.
The willingness to make those introductions is the signal. The substance of the references is bonus.
The compensation question
Operator compensation is where well-meaning sponsors fail their operators most often. The dominant failure modes:
- Equity grants that don't vest in alignment with the value-creation thesis. If the thesis is a 4-year stabilization-to-exit, the vesting should match. Three-year cliff vesting on a four-year plan creates exactly the wrong incentives at the wrong moment.
- Cash compensation that crowds out equity. We want operators with meaningful illiquid skin in the game. That requires keeping cash comp competitive but not lavish — the operator has to want the upside on exit.
- Threshold returns that are too easy. If the operator's equity payoff function looks roughly the same in the base case as in the stretch case, you've miscalibrated. The differential between base and stretch case should be meaningful.
The single failure we won't repeat
We made one operator hire several years ago that taught us most of what we now believe. The candidate had every visible marker we look for — strong references, financial discipline, a thoughtful 90-day plan. We were 95% sure on the hire.
The 5% concern was a pattern in the references: every reference described the candidate as "decisive" without ever describing them as "collaborative" or "empathetic." We talked ourselves into hearing that as a strength.
Within six months, the GM had alienated two of the three long-tenured department heads — both of whom were structurally critical to the business. The decisiveness we had hired for was actually a low tolerance for the messy work of bringing a team along on a change. We replaced the operator nine months in. The business lost an entire year and probably 100 basis points of compounded value.
"The decisive operator without the empathy is a wrecking ball you're paying to swing in your own building."
Since then, we've refused to make an operator hire where any soft-signal concern from references gets explained away in the interest of moving fast. The best deals can wait six weeks for the right operator. The deals that can't wait are usually the deals we shouldn't have done in the first place.