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Articles > Will Your Leadership Team Help or Hinder the Sale of Your Company?
According to a middle market study I reviewed recently, over 80% of business leaders are interested in some form of merger and acquisition activity over the next three years. More than half of the leaders would like to sell their businesses.
An important value driver for business leaders when considering a sale is whether they have developed a solid leadership team that will effectively transfer value to a buyer. A professional leadership team is attractive to professional investors, which means larger, more sophisticated buyers, and a broader array of potential buyers.
Not surprisingly, many business owners are so focused on day-to-day business operations that developing their teams for a potential sale is not their highest priority. In fact, they often feel the value of their business is directly tied to their personal involvement in managing all aspects of the operation. This comes at the cost of building a sustainable, growing business that is successful with or without their personal involvement. This is where a strong leadership team is key to creating transferable value.
There are many other key value drivers—the seller’s market opportunity and competitive advantage, along with the industry’s health; financial strength and controls; sustainable revenue streams and customer diversification; and vendor relationships and proprietary technology. These are all important. However, the number one question from our buyers is: “Who is on the leadership team that will run the company and continue to create value after the owner is gone?” No matter the size of the company, the buyer needs to see a strong management team that will be able to effectively maintain and grow the earnings stream of the company into the future.
The following examples of real transactions illustrate several ways buyers are likely to focus on the quality of the seller’s leadership team during the sale process.
Talking, Talking, and More Talking
One buyer had many ‘heart-to-heart’ conversations with the seller about the talent of the seller’s leadership team throughout the transaction process. The buyer was eager to know as much as possible about each individual. Having ‘best-in-class’ seasoned management was important to the buyer long term.
Another buyer’s CEO ‘interviewed’ the seller’s leadership team immediately prior to finalizing the negotiation of the purchase agreement, focusing on the team’s skill base and commitment. While this process can make some team members nervous, others welcome this discussion so they can put their fears about their role in the new company to rest.
Dotting the I’s and Crossing the T’s
Many buyers perform background checks prior to finalizing employment agreements with a leadership team. While management background checks may surface issues that neither buyer nor seller anticipate, catching those issues before close will ensure a smooth transition into the next phase of the company.
Getting Everyone on the Same Page
Some buyers are laser focused on the integration of the acquired firm into their organization. They may hire a consultant to lead the process to make sure the leadership team is ‘on the same page’ from the day the sale is finalized. Proactive communication throughout the process by the buyer’s and the seller’s leadership teams will keep everyone focused on growing the business.
Creating, developing and retaining a strong leadership team safeguards the transfer of value to the buyer and ensures a competitive multiple for the seller. It can also help ensure the seller’s key leaders are still with the acquired company far into the future. Most importantly, it is more likely to guarantee a win-win outcome for both buyer and seller.