Minimising the reliance on owners when selling - article
One of the critical issues for a potential acquirer is what will happen to the business when the current senior management, who through an exit process are effectively moving themselves out of the business, leave.
This is not so much of an issue when the acquirer is buying a tangible asset such as a building, intellectual property rights, or a brand or license. But in a majority of cases we find that potential acquirers will be looking to buy the ability of a business’s staff, systems and processes to create future profits for them.
One of their over-riding fears will be that the business is too dependent on the business owners. The thought: “Am I paying a large sum of money to enable people who are crucial to the business to leave?” will be very much at the top the potential acquirer’s mind.
And this fear may lead the potential acquirer to reduce the price they are prepared to pay, tie the owners into an earn-out which requires them to continue working for the company after sale or, in some cases, they withdraw from the acquisition altogether.
What is more, many of the business owners we work with have launched and developed their companies from an early stage and have built out their businesses around their individual skill sets, experience, preferences and personalities.
This is absolutely fine for a business in the early stages of development and growth, but it often means that vital parts of the business are run by people who are not specialists in their areas, which will ultimately restrict the organization’s ability to succeed in the longer term. This weakness is often compounded by the fact that many companies lack a full set of Board and Management level business skills.
All these issues will be brought into sharp focus when you try to sell your business. So if you want to achieve a clean exit, there’s a lot of work to be done in advance of even starting an exit conversation.
For most shareholders of private businesses, we believe that the key objectives when selling should be to find three or more acquirers willing and able to bid for the company at about the same time, whilst simultaneously organising and presenting the business in such a way that the transfer of ownership is smooth and relatively quick. They must also put themselves into a position when they can readily turn down offers that are not acceptable.
In our experience, the key to fulfilling each of these objectives will always be the development of an effective tier 2 of management, below the owners, with a track record of successfully working together and the ability to work without the departing owners.
We always recommend that a business owner should conduct a thorough review of their business from the acquirer’s perspective, and realistically assess their importance to a number of revenue-critical areas. Invariably we find that this self-assessment will need to cover brand and marketing activities, major client relationships, new customer development, operational management, supplier relationships, and innovation in products and services. Finally and perhaps most importantly, in the run up to an exit will be how you manage the recruitment, motivation, management and retention of staff.
We recommend that in the two or three years before initiating a sale process, you create a plan to develop other people in these roles. This will most likely be through a combination of training, hiring or outsourcing.
And by making your company less dependent on you and the other owners, you will also create a better-managed, faster-growing company, which will allow you to invest less of your time in the day-to-day running of the business, and more of it in concentrating on other aspects of the business which can add value to the bottom line, and thereby drive a higher valuation.
But most importantly, you will have allayed a potential buyer’s fears and made it a whole lot easier to secure the right exit at the right price.