Your Management Team is Your Cornerstone Business Value Driver When It Comes to the Sale of Your Business
When you decide it’s time to put your business up for sale, the most important thing you can do is look at business value drivers. Value drivers are particular characteristics that all buyers look for when deciding which business to purchase. These characteristics, ideally, directly result in just what the name indicates: driving up the value of your business. If you want a premium price for your business, you’ll need to focus on these drivers before you even start the selling process.
One value driver, in particular, can often be overlooked: a solid, motivated management team that will stay on and provide business continuity after your departure. Because management jumping ship once your business has changed hands creates risk for potential purchasers, they’ll look for companies who’ve installed a management team that is not only competent and knowledgeable but who is also guaranteed to stick around for the long haul.
“Surrounding yourself with quality people whose skills are different from yours is a cornerstone of a successful sale.”
If you want to raise the value of your business and give yourself the edge over another company a buyer may be looking at, concentrate on creating a secure, talented management team. That one aspect alone will garner greater value, ensure continuity, encourage future growth, keep your company’s reputation intact, and illustrate a healthy corporate culture.
A Loyal, Skilled Management Team Motivated to Stay on After the Sale Reduces Buyer Risk and Raises Value
One of the most integral, if little thought of, value drivers is people power, in particular, your management team. A business with a solid succession plan comprised of skilled executives incentivized—with either short- or long-term financial incentives depending on your timeframe—to stay on in their roles after the current owner has ridden off into the sunset is a highly attractive prospect to any buyer.
Not only is your management team necessary for specific responsibilities and day-to-day accountability, but they’re also central to the sale process. While you, as the owner, handle most of the details and negotiations, you’ll still need to rely on their expertise to guide you through the process, and certain positions in particular.
“While the business owner plays a significant role in the negotiations, having a well-developed management team with specific responsibilities and day-to-day accountability, specifically during this process, is very important.”
For starters, your CFO’s support and knowledge are crucial in being prepared for and answering questions related to your financial records and their accuracy, forecasts and their reliability, and budgets and systems.
You’ll also need your CIO’s support to assure a buyer that you have an effective and efficient marketing and communications strategy in place that will continue to work for the business after you’ve sold. In addition, your CIO will be integral in ensuring all the operating systems are optimal and any technical and security issues are addressed.
Because the management team is responsible for setting company objectives, monitoring activities, and motivating staff, it is or should be, the anchor of your business. In many companies, this anchor is the owner. This reduces value and increases the risk for a buyer. So if this sounds like the state of affairs in your company, work to put together a management team that has a variety of skills different from yours, and each other, who can run the ship without you and ensure they have every reason to stay post-sale.
Take the case of Super Steel LLC, a Milwaukee-based steel fabricator. Its president had retired 5 years earlier, and though he’d sold the business to his management team, they had failed to thoroughly assemble a “next-generation” management team. Therefore, when faced with a tough economy and a lack of leadership, they were forced to file for receivership, with the original president rescuing the company. Learn from that mistake and ensure you build a strong employee bench with managers who will step up and effectively run the company should senior leaders, namely you, move on.
Not sure if your business can run without you? Try taking an extended vacation with no contact and see what happens when you get back. If your business is chugging along, business as usual or even growing upon your return, you have an idea management team and could use this coveted value driver to command a higher price when you sell.
“…a prospective buyer will ask what the current management team brings to the transaction.”
A team of leaders with defined management responsibilities and accountability whose loyalty lies with the company, not the owner, and who will continue to bring in revenue will enhance the value of the company to buyers.
A Competent, Cohesive Management Team Is the Foundation of Future Growth in a New Buyers Hands
A well-oiled, established management team is invaluable because it takes time and effort to find just the right people—and just the right people to work together. A cohesive management team that will stay together after a sale is priceless because it will ensure not only continued success but future growth. As they say in the investment banking business:
“Great management teams are worth their weight in gold because no matter what happens, they find a way to win.”
In most negotiations over sale price, the buyer goes into it not expecting future cash flow to match the current, let alone surpass it. But if you’ve taken the time to assemble a quality senior management team who already run the business and are ready and willing to continue to do so after the sale, a buyer will have far more confidence in the team’s ability to grow the business, resulting in less risk, more value, and a higher price.
Jack Welch, the former CEO of General Electric, determined succession planning to be one of his greatest accomplishments during his time at the helm. As an owner trying to attract the best price for your business, you should also treat establishing a management team in preparation for your departure with the same seriousness.
Before beginning the sale process, take a good look at your management team and ask yourself, “Has management been efficient in the past, and are they still? Are they up to the challenges of the future? Do they have the education, expertise, and desire to take the company to the next level, even without you?” If the answer is no to any of these, take the time to focus on finessing your management team before selling.
An Experienced, Harmonious Management Team Equals Continued Customer Relationships, Consistent Business Reputation, and a Healthy Corporate Culture
Another risk buyers face when considering a company’s current management team is whether or not the team is knowledgeable and experienced enough to retain and maintain current customer relationships. Your customers are your business; therefore, it’s critical the buyer knows the management team can keep up relations with your customers and keep them from walking away with you when you do.
This has the added benefit of keeping the company’s reputation intact. If a potential buyer can see at a glance that your management team can work together and continue to nurture customer relationships and maintain the company’s existing reputation while weathering the change in ownership, they will choose to purchase your business rather than another without this advantage, and at a better price.
One last bonus of maintaining solid, stable management is that it highlights a healthy corporate culture. The staff takes their cue from their leadership, and any dissent, fear, or ill will results in an unhealthy atmosphere felt by employees. Toxic corporate culture generally results in high employee turnover, and because buyers will look at that closely during due diligence, that could easily negatively affect your company’s value.
When you invest in your management team, you invest in your company, and you invest in its future—and yours.
Because selling your business is a complex process, the state of your management team is critical. Purchasers will always consider the quality of the human element of your business, and that centers on your management team. At the same time, you’ll need that management team to help you navigate the selling waters.
To realize the highest price for your business, you have to prove your business will continue to operate successfully without you, and even continue to grow without you, and your management team is pivotal in that regard. Continuous, knowledgeable management is crucial to business continuity and reducing the risk to the buyer.
Your management is also the link to continued, stable customer relationships, which leads to a consistent company reputation. Your customers are your business, so those relationships will have to be nurtured throughout the sale process.
And don’t forget your employees while you’re preparing to sell. Your management team is essential here too. A talented management team that works together well and is prepared to stay when your business changes hands highlights a healthy corporate culture that trickles down to the staff.
The bottom line is your management team is valuable and vital for your business to continue to prosper over time under a new owner. So if it’s time for you to sell, first ask yourself if your management team is in order—will your business continue operating as usual if you go off on an extended vacation? Can they provide continuity after the sale, and are they even willing?
“Buyers look for situations where management and/or key employees want to stay for the long term.”
If the answer is no to any of these questions, plan ahead and focus on this value driver first. Potential buyers want reduced risk and are willing to pay more for it. Your management team is the cornerstone of your business sale success.
And don’t try and navigate the intricacies of the sale process yourself if you want top dollar for the business you spent so much time, energy, and heart building. Do yourself a favor and hire a business broker. Just like other professional experts you rely on regularly to handle that which is their strong suit, not yours, a broker knows all the ins and outs of how to get you the highest price for your business.