A strong management team is a key factor in driving value. In our experience, companies with well-rounded, experienced management teams receive far more buyer interest and better valuations.
When we present a client’s business to a buyer, one of the first topics of discussion is about the quality and depth of the company’s management. The buyer is interested in who is currently running the business and, more importantly, who will remain post-closing to operate and grow the business under their ownership.
PRIVATE EQUITY GROUPS ARE HIGHLY FOCUSED ON MANAGEMENT
The issue of management depth, quality, and continuity is particularly important to private equity groups (PEGs). PEGs acquire companies, but they do not operate them, so they rely on the existing management team to stay in place. The PEG model is to acquire a company, aggressively grow it over three to seven years, and then sell it. To achieve the aggressive growth targets in their financial model, the acquired company must have the necessary management infrastructure in place in critical positions such finance, sales, and operations to support the growth. Although PEGs will augment the management team and fill some needed positions post-acquisition, they are most excited about companies with an existing management team that is excited to grow the business under their ownership. PEGs will often pay a higher price for a company with great management, and in some instances will decline to make any offer at all for a company that is deficient in key positions. Private equity buyers will tell you that when they buy a company what they are really doing is investing in the management team.
STRATEGIC BUYERS ARE MORE FLEXIBILE
Strategic buyers can be more flexible when it comes to issues relating to the seller’s management because they often have the bench strength to fill positions from their existing operations either temporarily or permanently. That being said, strategic buyers are also focused on retaining critical management personnel post-closing to make sure that they do not loose the “tribal knowledge” that made the company successful. When we represent a company with management issues, or a situation where key managers will be leaving the company post-closing, we will focus more heavily on strategic buyers (including private equity portfolio companies) rather than approaching PEG buyers for a new platform.
Here are three key positions that buyers focus on:
CONTROLLER: ARE THE FINANCIAL SYSTEMS, CONTROLS, AND PROCEDURES IN PLACE?
A controller is a key position that is critical to the stability of an organization. A good controller will implement policies and procedures to ensure that the back-office functions run smoothly, that costs are contained, and that the company can produce timely and accurate financial statements. If you are relying on an untrained bookkeeper to oversee your critical finance and accounting functions, then it is time for an upgrade. A controller can provide you with weekly management operating reports and timely monthly financial statements which are extremely useful tools to help you run the company. Additionally, a controller can help relieve the burden of other time-consuming tasks such as lease renegotiations, insurance renewals, negotiating volume or early payment discounts from vendors, and a host of other items that can both save the company money, and free up your time.
SALES MANAGER: WHO CONTROLS THE CUSTOMER RELATIONSHIPS?
Customer concentration is a challenge in getting deals done since the potential loss of a key customer presents a risk to the buyer. The problem is exacerbated when the relationship with the top few customers is held by with the owner. One question that buyers always ask is who within the organization maintains the relationship with key customers and will that person(s) remain with the company post-closing. If you are the reason that your customers are purchasing from your company, buyers will view this as a risk once you leave. It may be time to begin transitioning the key customer relationships to others within the organization.
GENERAL MANAGER: WHO MANAGES THE DAY-TO-DAY?
Day-to-day operations is the area that is the most difficult for owners to delegate. But, if the organization chart shows most of the lines leading directly up to you, then it is time to bring in a general manager. The most successful companies are often those with a strong general manager in place that oversees the daily operations of the business; freeing up the owner to focus on the bigger picture. You may have heard the phrase that a business owner should spend her time “working on the business, not working in the business”. Having a general manager allows the owner to do this, and buyers look very favorably on companies that have an experienced general manager in place. Filling this key position will improve the company while at the same time increase its marketability.
We have found over the years that most business owners understand the importance of minimizing their individual importance to the company and broadening their management team, and they recognize the positive impact this will have on the marketability of their company. The challenge is execution.
Do you have questions about owner transition timelines, management continuity issues, or anything else related to M&A? Give us a call or send me an email: SCOTT@CENTERPNT.COM . We would love to speak with you.