Businesses with weak management teams often cannot be sold or sell for a fraction of what they are worth.
That makes sense if you think about it from a business buyer's perspective. When acquirers buy a business, they are basing the investment on a belief in the stability of the current earnings of the business. Indeed, the worst case scenario is that a new buyer buys a business based on certain revenue, profit and cash flow expectations, only to find that the financials tank as soon as the new owner takes over.
Smart business buyers realize that as long as a good management team is in place, there's a high likelihood that the business will stay in positive territory. In other words, if you put a good management team in place, you can sell your business for a higher price.
The key takeaway for business owners is to recognize that most business buyers will pay a premium for a great management team.
The obvious caveat, of course, is that your management team must be a driver of revenues and profits. Having an expensive management team that isn't earning their keep won't do much for a business valuation. In fact, a bad management team is valuation reducer, rather than a valuation enhancer.
Beyond, improving business valuation, there's a second compelling reason to build a good management team up prior to exiting a business.
Business owners who truly want to leave a business and be done with it forever will find that goal to be a challenge if they do not have a competent management team in place. When there is no senior management team running the company, potential acquirers of the company may get nervous and ask the owner to stick around.
They may even structure much of the compensation from the sale of the company as an earnout, meaning that the selling owner has to stick around for a number of years and continue to run the business. In that case, the payout the selling business owner receives from the sale of the company will often depend on how the company does during the earnout period.
In this scenario, the selling owner is hit with a double-whammy for not having taking the time to put a responsible and competent management team in place. First, they get a lower business valuation when they sell a company, and, second, they will be required to stick around much longer than they might have hoped to.
Part of the standard exit planning process is to inventory and assess the management team. This needs to be done years prior to selling a company because it takes a while to but a good team in place and free the owner up to work on the business instead of in the business.
For business owners who are thinking about selling, the key takeaway from this article is that you need to surround yourself with quality management team members whose skills are different than yours. Doing so is a mandatory prerequisite to a successful sale.