Evaluating a Management Team Through the Buyer’s Eye
Every growing business needs a strong management team in place to help it accomplish its goals. Particularly when it comes to a business that is preparing to sell, having a solid team to both keep the business running during the sale and help manage the transition post-sale is paramount to a successful outcome for both buyer and seller.
While CEOs are often the apple of investors’ eyes, evaluating the senior leaders within a company can help inform a buyer about the potential of his investment in addition to helping a seller attract the best parties to the table and successfully bring the deal to close.
No, this evaluation is not something you can put numbers around. Though many important attributes of management teams are intangible, a framework for assessing the strengths or weaknesses of such a team can help to determine whether they will be an asset or how to make improvements prior to pursuing a deal.
The Earlier, The Better
While CEOs sometimes wait to bring their teams into the discussion and planning around a sale or acquisition, the sooner the right people can be informed and involved, the better. Due diligence starts almost the moment a letter of intent is signed, and surfacing all of the information that will be part of that process at the onset will help a seller more accurately present his company to investors. As questions come up during the due diligence phase, a CEO will feel comforted to have his business line leaders able to defend and explain any queries from the buyer.
From the buyer’s perspective, the CEO who comes to the table with his senior leaders already aware and a part of the deal is likely much more prepared to engage in a thorough and clean due diligence process. It’s also a signal that a CEO relies heavily on his team and trusts them enough to have them in the room even during the earliest stages of a deal.
Performance During the Deal
Once the deal is off the ground, it’s likely that the CEO’s attention will be elsewhere. Because the sale of a business can often take months, even years, it’s an important time for the management team to be able to run the show. Particularly because a final purchase price for the business will be based off of a multiple of EBITDA and any turn in performance could mean a less than desirable outcome for the seller, ensuring business continues as usual during a lengthy and time consuming deal process is vital.
For a buyer, knowing a business can maintain steam without the CEO at the helm is a crucial test in situations where the CEO plans to fully exit the business or step back his responsibilities considerably. This is also a time where a natural replacement for an exiting CEO could emerge. Many buyers bring operational expertise in addition to financial backing to the table, and often look to insert relationships of their own into empty management roles. Whether it’s the COO, CFO, CMO or otherwise, establishing a relationship with the buyer during the deal process and assuming an ownership perspective could serve to elevate a deserving individual internally instead of opening the door for new talent.
Creating a Seamless Transition
It’s of mutual interest to a seller and buyer that the post-sale transition goes smoothly. Though a CEO may be leaving the business, it’s something he’s worked long and hard to build, establishing deep relationships with his employees, partners, and customers as well as personal reputation in his market or community, along the way. Emotionally, it’s always easier for a CEO to depart knowing he is leaving the business in capable hands. Buyers shouldn’t discount this emotional value – a significant portion of deals never get to close because a CEO decides he wasn’t ready to sell.
A company’s senior management team will be the key resource for the new owner after the deal closes. Whether it’s managing employees, striking new partnerships or pursuing more aggressive growth strategies such as an acquisition, a buyer will need to lean on these incumbents who know the industry, have the relationships, and are familiar with directions that have been taken in the past that will help inform future decisions.
The Soft Side of Leadership
A more qualitative analysis of a management team can be an invaluable exercise when determining whether they might have a positive influence on the deal process. Buyers often take notice of senior leaders who have spent a significant time at the company and evaluate the contributions that have been made during their tenure, particularly if they are pulling down a hefty salary.
Managers who have a financial stake and therefore heightened personal interest in the success of the business are much more likely to want to see a seamless and successful transition through. Long before a sale is but a twinkle in a CEO’s eye, incentives can be put in place to encourage management team members to become invested — both financially and personally — in the growth and long-term success of the company.
It’s often said that culture flows from the top, and it’s true. Any company in the midst of such a significant change puts itself at risk of disgruntled employees, confused customers, or opening doors to competitors and lost market share. With a management team informed, involved and effectively communicating and managing the transition to the new owner, these risks can often be mitigated and post-sale success ensured.
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