You’ve heard the adage, “You’re only as good as the people you surround yourself with.” This is just as true in the business world as it is in life. While cash flow and customer base are great value drivers, your management team is also a key component of the valuation equation. The question is, how does your management team factor into the value of your business?
Several elements contribute to business growth and cash generation. Broadly speaking, your equipment allows you to practice your trade; your real estate gives you a location to operate; your warehouse and shop guys execute production; and your management team makes sure the business is a well-oiled machine overseeing vendors, customers and employees.
When a buyer performs diligence on your business they will assess each channel or system. One of the first questions asked is “how good is your management team?” Once a buyer acquires a business, this team is the first line of defense safeguarding the operation. The management team ensures the business transitions smoothly under new ownership. They are the ‘training wheels’ for a new owner.
Equally important, management teams often maintain valued relationships with customers, vendors and current employees. Formed over many years, these relationships are important and must be handled with care during the transfer of a business. A strong management team remaining post-transaction gives these parties the assurance they need that business will continue to run smoothly going forward.
If the current owner is also the chief cook and bottle washer with no team in place to run the business when he/she steps away, a buyer will ding the valuation of the company. That’s risk for a buyer. If the buyer has to hire additional resources post-transaction because of the owners exit they will lower the valuation, accounting for a replacement to fill these gaps.
It’s important to look at your existing management team objectively. Ask yourself: Do I have a rockstar group that is really creating value and driving growth or does my team maintain the status quo - doing no more, no less? For a $10MM company, is this the group that will be able to help take your company to $50MM? If a buyer plans to double or triple the size of the business in the next 7-8 years, can they do that with my current team? If the answers prove your team has some missing pieces, the buyer will need to invest significant time and money to get the right people in place to help achieve that growth and the valuation will reflect that.