As you transfer the ownership of your business, it’s likely you will also step aside from a management position if you currently hold one. Whether you’re selling to a private equity firm, employee, family member or strategic buyer, who manages your business once you leave is a big deal for your valuation, keeping employees at ease and keeping your customers’ trust. Whether you keep your current management team or install a new one, they will have one of the loudest voices in how outside purchasers value your business.
Valuation Takes into Account Financial and Non-Financial Factors
Revenue, cash flow analyses, asset value, gross profit and other financial factors all give prospective buyers a decent picture of the health of your business. Still, you can’t let your guard down even if you think you’re in a good place financially. One of the most important considerations to keep in mind, as we’ve discussed in this blog before, is discretion. As you communicate to your management team that you’re selling your business, it’s important for them to keep that information confidential. The next struggle you must endure, especially as you get closer to sale, is to keep your management team focused on managing the business rather than zoned in on the details of the sale. If at all possible, with few exceptions, it’s best to only tell the management team of a sale once the sale is imminent (the sale is all but locked). Your management team will be the most important non-financial factor in the sale, but they don’t deserve the added levels of stress a drawn-out selling process can bring.
Why Your Management Team Drives Your Business Value
Your management team — or, more specifically, the management team that will transfer when you sell the business — is easily your biggest non-financial valuation factor for a few reasons. Investors can identify and make immediate valuation judgments based upon the quality of the management team you have in place. Outside buyers would much rather buy a company where they can trust the current management team in place, rather than make wholesale changes to the team once they buy the company. Investors understand that management directly affects and promotes every other value driver, from cash flows and revenue to customer diversification. Buyers want to see their vision for company growth can come to fruition. This can’t be done if they can’t see value in a management team. You will want to objectively assess your own management by asking yourself , “would I hire this person again if given the chance?” If the answer is no, you need to make a change.
Businesses Care About What You Can Transfer
Management is your most indispensable tool as a business owner. If you think a management change is in the cards, making the moves to secure a quality management team must become your top priority. An advisor that specializes in succession planning can help you evaluate, create and sculpt your management team before the sale. Remember, buyers don’t care as much about what you do as an owner before the sale as what you’re able to transfer afterwards. If you can nurture a quality management team that can transfer after sale (while keeping management incentivized to stay), you can expect to receive the full value of your business and then some.