One of the biggest misconceptions that business owners have is that the value of their business is directly tied to their personal involvement in managing all aspects of their operations. In fact, nothing could be further from the truth. The attractiveness of the business to a buyer is what is transferable to the buyer, not the ongoing management prowess of the seller. If the owner/seller has a management team that cant sustain the growth of the company without his personal involvement, the business has significant future risk and, as a consequence, represents little value to a buyer. To some owners, this may seem counter intuitive and an assault on their egos, but its a fact. If the business cant survive and grow without the owners daily intervention, its value will be diminished dramatically no matter how much it has grown or generated profits in the past.
Peter Drucker, the world's foremost management consultant, held that a fundamental requirement for creating a successful enterprise is "building a top management team long before the new venture actually needs one and long before it can actually afford one."
A top value driver
Most private equity groups and other professional buyers judge the value of possible acquisitions by assessing the strength of a company's value drivers, the most important of which is its management. These savvy investors recognize the value of top-notch management teams and don't always bring in star outside managers to run the companies they buy. In fact, many prefer to acquire a company with strong management in place. Creating, motivating and retaining great managers is key to capturing future business value. Without a strong, motivated and secure management team, the risk to delivering a projected earnings stream is just too high. Professional buyers also realize strong management doesnt hire C-workers but build the workforce to their higher standards, from the top down. They are the nucleus of a top performing organization.
Having A-players on the sellers management team is indispensable to any company's long-term future. The reason is simple: Management is responsible for the creation, direction and rate of growth of all other value drivers. Things like customer diversification, a proven growth strategy, sustainable revenue, improving cash flow, competitive advantage and financial controls all depend on good management. More effectively than any other value driver, an A+ management team creates transferable value. It may be hard for an owner to accept, but to realize the potential a buyer will pay for in a business, sellers must create transferable value beyond the limitations of the current owner.
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Transferable value is a company's ability to continue operating successfully, with minimal disruption to its cash flow, after the owner leaves. In the absence of transferable value, businesses can't be sold for enough money to bridge the gap between what owners realistically have today and the amount they need to live a financially independent future. Any qualified adviser helping owners transition out of their businesses must have a solid understanding of what can be done to increase transferable value. Business risk identification, succession and contingency planning are all part of the first wave of business value enhancements and owner readiness needed to formulate a successful transition. But all three must be in concert to achieve the best possible transfer value. The strength of the management team is integral to the enhancement process. The good news is that business owners dont have to try to create this on their own.
Succession planning
Advisers skilled in succession planning are constantly involved in helping owners create, develop, motivate/incent and retain, great managers. To accomplish this, owners should look to executive talent providers who have the skills and experience needed to develop superior management teams. These experienced advisers have helped many owners recruit and secure outstanding talent in the past. They possess excellent insight into the companys corporate culture and can provide the needed skills offered by exceptional performers.
Management team development is indispensable to business growth, risk reduction and transferable value. A good succession plan will help the owner evaluate existing management based on their current performance and ability to further develop the company. Additionally, for an owner's eventual transition to be successful, management must remain after the owner's departure. Third-party buyers will insist on it, and if insiders (key employees or children) assume the reins, they must be capable of managing the company if the owner is to get paid what the business should be worth. For this reason, part of every transition plan is the creation of a succession plan with incentives not only for managers to perform well but to also stay after the owner moves on to his platinum years.
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A good transition adviser understands the broad and diverse range of information and experts involved in a successful outcome. Like a general contractors role in a construction project, a GC has a network of skilled trades people (plumbers, carpenters, electricians, etc.) who can complete specifically assigned roles in the overall project. In transition planning, experts are required in succession planning, strategic planning, personal financial planning, estate planning, tax planning, contingency planning and sell-side transaction execution, to name a few. This is quite a group of professionals to identify and coordinate to complete the task of getting what owners need to fund the next stage of their lives. All the while, owners still have a business to run and customers to keep happy.
Most professional advisers are not equipped to find, develop, motivate and retain best-in-class management teams, despite this being a critical requirement for business value. The job of a good transition adviser is to initiate and manage a process that describes what owners need to do to exit their companies on their terms and help them close what can be a sizable gap between the value of their current business and what they need to exit successfully. Owners should realize that strong management is a key element for maximizing transferable value and they need to assess how good their current team really is and upgrade it where required. A companys management is a distinguishing feature in a world full of commoditization and can be the impetus for getting that premium valuation.
Ampulski, PhD, CM&AA, CEPA, is managing partner of
