Key Value Drivers:
How Strong is Your Management Team?
Most entrepreneurs hope to one day sell all or a portion of their company to an internal or external buyer or an equity partner who can help grow the business. To maximize the sale price of the business, owners should focus on a few key value drivers between now and the time they plan to sell.
Growing EBITDA is the first thing many owners think of when it comes to increasing the value of their business and its future sale price. Valuation is usually determined via a multiple of EBITDA, so sustainable EBITDA growth is naturally one of the most important business value drivers.
Buyers Need Management Assurance
Just as important to many buyers, though, is the strength and depth of your company’s management team. This is especially true if you as the owner will be stepping away from the business completely after a short period of time. In this scenario, buyers will want to have some kind of assurance that:
- Your management team is capable of handling the day-to-day aspects of running the business in your absence;
- Key customer and supplier relationships aren’t dependent on you, the owner; and
- Your key managers and executives are incented to remain with your business during and after the transition phase.
As you gauge the strength and depth of your management team, start by asking yourself a few questions:
- Do you tend to make most or all of the important decisions yourself, or do you share this responsibility with your managers and executives?
- Do you personally possess the relationships with your most important customers and suppliers, or have customers and suppliers also been introduced to your managers?
- Are you good at delegating tasks, or do you prefer to try to do everything yourself?
- Do your employees tend to come to you with all of their questions and concerns, or do they first approach your managers?
- Finally, can you picture your company running smoothly without you at the helm, or do you think it would stumble and eventually maybe even fail?
These are the kinds of things potential buyers are going to want to know when assigning a value to your company. They will want some kind of assurance that a strong management team is in place so operations will continue running smoothly after you depart. Otherwise, buying your business will represent a huge risk for them — which they’ll factor into their valuation, if they even make an offer for your company at all.
Strengthening Your Management Team
If the answers to the questions above reveal that your management team may not be up to snuff, now is the time to start proactively strengthening your team. Here are three hands-on things you can do right now to accomplish this:
- Become a better delegator. No doubt, this is hard for many business owners and entrepreneurs. These are usually Type A personalities who think they “know best” so they should just do things and make important decisions themselves. This might work in the short run, but it will eventually lead to a weak management team bench and a lower business valuation when you want to sell your business.
- Introduce customers and suppliers to your key managers and executives. Your customers and suppliers need to know and become comfortable with the people they’ll be working with after you’ve left the company. If they don’t, these critical relationships could become vulnerable when you’re gone, which could put the entire company at risk.
- Help your management team adopt more of an entrepreneurial mindset. There’s a big difference between a “management” mindset and an “entrepreneurial” mindset. When managers and executives start thinking more like entrepreneurs, they will add more value to your company by bringing ideas to the table for how the company can prosper and grow both now and in the future.
To discuss more ways that you can increase the value of your company by strengthening your management team, give us a call. We have helped many owners build management team bench strength in preparation for an eventual business sale.