How important are the management team?

"I hire smart people and get out of their way." – Lee Iacocca, Ex-CEO, Chrysler

The continuity of management is critical to all successful business sales.

When a buyer is considering buying a business, they typically are looking for well-run businesses that they can enhance. Rarely do they want to buy a troubled business.

To a successful business they can add new products, new distribution channels and finance.

To a troubled business, they must divert precious management resources, time and money to turn it around. There is always the fear that they do not know the full extent of the problems no matter how strong the due diligence has been.

The management of the business are central to that continuing success. After all, the owners may have built the business, but they are now exiting.

It is the job of the owner to set the vision for the business and provide the resources to deliver on that vision. One of the key factors will be recruiting the right management team and empowering them to pursue the company’s goals.

Their success in this will be key in attracting buyers and driving a competitive sale.

And competition drives up the price!

The process of creating a management team begins long before a sale – typically five years, but most likely a minimum of three. By the time you come to sell they must be the ones directing and running the business day to day, making the decisions on sales, purchasing and people. The owner's role will be centred on empowering the management team, strategy, investment and finance – areas that a new owner will be comfortable to step into. They must embody the culture and values that have delivered the success.

There are two challenges arising from this:

1. How do you ensure management continuity to complete the sale?
2. How does a buyer become comfortable with the idea that the management will continue?

Continuity

For the core management team, there are three attributes to consider.

1. Share your vision for exit: Explain what you are looking to achieve, and the timeline. Many a business owner is reluctant to share their thoughts with the team. They fear they will lose them or that they will be resentful. However, it is in the mind of every manager to know their own career path and to understand how they fit into the plans of the business. If this vacuum is unfilled, they will most likely leave. Or worse still, they stay and not give their all!
2. Make their role central to success: This will help ensure they have a role post-sale. The group you hire and develop must work as a unit with clear lines of individual authority and responsibility.
3. Share the rewards: The opportunity to monetise their success with a significant, potentially life-changing amount is a key motivator. It can be about the money, but just as importantly it is a measure of how good they are at what they do.

From an owner’s viewpoint, the aim is to ensure that this core group are not tempted to leave and are motivated to work as a team and deliver success. Create a win-win for both sides.

It is important that time is taken to come up with the right scheme, with clear measures of the value of the pot and the relative share each one receives. To this must be added workable tax structures. Planning is critical to ensuring these are optimised.

Buyer perspective

Central to most buyers’ thoughts will be who will run the business. Knowing that a successful management team is motivated to continue will be foremost in their minds. Many business owners are reluctant to allow this engagement, fearing the unknown. Throughout the due diligence process they will be directly and indirectly challenging the team to see how they respond and ultimately looking for answers to two questions:

1. Are they delivering for the business?
2. Do they have the potential to grow and become part of the success of the new combined business?

Most buyers will put together an incentive package at least equal to current arrangements, with a combination of salary and bonuses.

Overall, management are critical to a successful sale. As the owner, it is your job to recruit the right people to copper-fasten value for all sides.

Crowe's dedicated corporate finance team has a wealth of experience advising clients on delivering value in business. Connect with our experienced team to discuss how we can help you make smart decisions for your business that create lasting value.