As discussed in previous articles, a business owner becomes an entrepreneur because s/he has vision, ambition and confidence in their ability to execute; he/she will demonstrate this by building a successful business. However, after a certain period, which can be a business life time, they either have to find a successor or sell the business. In many cases, the business is their pension fund so, at a certain point, selling it becomes critical.
When Document Boss is engaged to sell a business, one of the key elements we immediately evaluate is to what extent the business relies on the business owner for its daily functions. Also, how mature and independent is the second tier management and how capable are they of running the company independently? We often encounter such situations, not only with relatively small companies but also larger companies with revenues in excess of $50M, where the business’ success is dependent on the drive, knowledge and experience of the main lead executive.
The bad news is, that if we judge that there is a high dependency on the business owner (our opinion and not necessarily theirs), then there is no such thing as a “quick fix”. It is not a situation that is easily remedied by increasingly delegating to the existing management team. This could even worsen things as they will not be used to assuming a strong leadership role, and it may therefore be better to add 2 or 3 new executives, with the required additional skillsets, to the management team. .. In particular, the roles of the Sales Director, Marketing/Product Management and/or Finance Director must not be vulnerable or weak.
Let’s examine these roles:
Sales Director
- An early indicator of ability is obviously the performance of their sales team and if they are able to hit ambitious growth targets, including winning new customers. If they simply realize the majority of their business through existing customers, keeping up with maintenance income, then warning signs might be orange or red.
- Average order intake: Does the sales team have the ability to close above average sized deals? Or do they have to close many small deals in order to hit their target? If the latter is the case, they may have the wrong sales model.
- Sales methodology: If the Sales Director looks at you open mouthed when you enquire, “Which sales methodology do you follow?”, then you should be forewarned of potential underperformance or only selling within their comfort zone.
Marketing Director
- Website: A website that is feature-rich but benefit poor is an indicator of the caliber of the marketer.
- Key KPI’s: If they cannot share key KPI’s around conversion rates from the number of generated leads turning into prospects and eventually deals, this is another warning sign.
- Social Media: Not actively producing a stream of news which is vigorously pumped through Social Media etc. is another negative.
Finance Director
- Every Finance Director is capable of producing periodically the P&L, budgeting, cash flow calculations etc. However, producing an up-to-date balance sheet every Quarter, Monthly cash flows, three year budget, horizon and growth planning and ensuring all key documentation is in place, in compliance and in electronic version, can be a stretch for some.
- Another important factor is the accuracy of reporting over previous years. Is everything correctly consolidated?
Secure a High Valuation
The business owner may well have felt comfortable working with his team for many years; they will have started to get used to each other and to acclimatize to each other’s habits. However, the first thing an investor or strategic buyer will want to ascertain is how well the processes are documented and secured, regardless of who undertakes them. If the potential buyer uncovers mediocre performance and lack of ambition, regardless of the growth being achieved, then the chances are pretty high that the business will ultimately fail to achieve a good valuation. It is more likely to fall prey to one of their direct competitors, interested only in acquiring the customer base, securing the existing maintenance income and generating their own synergies – rather than in making a strategic acquisition.
Conversely, a well-blended team who can all consistently articulate the positioning, ambition and potential of the company and who can be relied upon to effectively run the business, offers a much more attractive proposition to a buyer. In addition, a cohesive and committed team offers the re-assurance of continuity after the deal has been done, as well as delivering predictable, transactional value for the new owners. Furthermore, with some form of golden handcuff bonus, they can be confident of keeping the entire company together for the next 1-3 years - and possibly even training up existing staff to become future managers in the consolidated business.
Create a Clear, Cohesive Corporate Narrative
Many businesses – both big and small – often find it difficult to articulate the fundamental aspects of their company, such as the products they sell and their organisation’s overarching purpose. Management teams and employees will also often describe their work and the business they work for in entirely different ways. Lack of a clear and coherent corporate narrative creates a number of inconsistent stories about a business. This causes confusion for investors and buyers and can ultimately reduce confidence, affect reputation, investor sentiment and even operational performance.
Creating a corporate story is essential for ambitious and successful businesses; it ensures that all parts of any organisation are speaking with one voice, uniting disparate audiences with a single, compelling story. It clearly expresses the purpose of a business, articulates its winning position and creates coherence in all communication. Importantly, the corporate narrative forms the basis of the initial conversation with any potential buyer. It will be the hook that dictates further interest or not.
Keys to Success - A Strong Management Team and Clear Exit Strategy
To summarise, in working towards the sale of their business, the business owner needs to be aware of two vital elements: creating a strong and mature management team who know and can clearly articulate your corporate story, coupled with the creation of a realistic exit strategy.
It cannot be overstated how important it is for owners to ensure that preparation for these two elements starts early enough. The best investment a business owner can make in his company is to make his/her team less dependent on his/her presence the business, thus rendering it a far more attractive proposition when the time comes to sell.
