Maximizing the Value of Your Business Starts With Your Management Team

March 1st, 2007

Although it may be a bit of a cliché to say that people are your most important asset, it is an absolute truth when it comes time to sell your business. Potential buyers will assess your company’s ability to thrive after the transaction, and the assets that “go home in the elevator every night” are critical to sustaining the company. If you are beginning to ponder the right time to sell your business, and your goal is to maximize its value – take a hard look at the organizational structure that is underneath you. Do you have a visionary leader and a core group of managers in place that could run your operation successfully after you leave?

This is a hard topic for many owners to think about as retirement edges closer: determining whether your management team — which may consist of family, friends, or individuals who have been with your company since inception — could really sustain the business under someone else’s ownership.

As you consider this question, put yourself in the shoes of a potential buyer of your business. Most buyers will evaluate your business based on the following “Key Management Team” attributes:

  1. A visionary leader supported by executives who have industry experience and tenure with the business.
  2. Client relationships that are maintained by multiple executives, mitigating the potential for losing clients if one of the executives leaves the company.
  3. Personnel that is well-versed in managing operations, sales and marketing, training/quality assurance, technology, and human resources aspects of the business.
  4. Executives with M&A and international experience are considered a plus, since all buyers want to grow the business they acquire and may look to M&A to support organic efforts.

When a buyer is evaluating your business, not every single attribute is critical to them. However, if you want to maximize value and portray that the business is truly run by the team in place and not by you, the most critical component to have is a visionary leader with industry experience and tenure within your organization — someone who maintains the client relationships, oversees the management team, and has the drive and willingness to take the business to the next level.

Case Study – “Due Diligence Uncovers Your True Role in the Business”

I was recently involved in a deal where an owner of a mid-size consumer agency (50+ full-time employees) portrayed himself as not critical to the operation. However, when our client had us look “under the hood” during due diligence, we found the exact opposite to be true. The owner said that his manager — the so called “visionary” whom he had been grooming for years — was running the show, but we uncovered that the owner was actually wearing multiple hats in the business (operations, sales, human resources, etc.), which is pretty typical for this size business. We were able to discover this from staff interaction during a site visit and by talking to the company’s key clients toward the tail end of due diligence — a “perfect recipe” for a buyer to get nervous and walk away from a deal.

The buyer ended up getting through these concerns and instead of just walking away from the deal, they adjusted the purchase price by reducing the owner’s salary and benefits from the Adjusted EBITDA (Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization) calculation. As a result, the economics of the deal changed and caused the owner to walk away, as his expectations for value were not being met.

The Take Away From This Deal

  1. Before going to market, have someone else objectively assess if your visionary leader and team of executives in place could truly “stand alone.”
  2. Always truthfully address the owner(s) and executive team’s role and responsibilities up front with a buyer.
  3. Make sure your “visionary” has been groomed and is ready to communicate to buyers his or her critical role within your organization and can substantiate the claim that the owner’s involvement is limited to guiding the strategic direction of the business.

It is certainly easier said than done to find someone with your vision. You might find a person like this from an executive recruiter, or you may be approached by a successful leader at another firm whose non-compete just came up. Ideally, this person is someone you have worked with at your company for quite some time, and is also someone you can mentor and train to take over the reins and guide your business toward a sale that can achieve your value expectations.

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