5 Management Responsibilities That Aid the Sales Process

Strengthen These Key Management Team Positions Before Selling the Business

As part of a business sale or merger, the buyer will want to understand the responsibilities of the seller’s management team.  The critical question will boil down to: ‘Can the management team execute the business strategy once the business has been sold, absent the owner and the key managers?’ The answer to this question will hopefully be ‘Yes.’

The five key areas of due diligence the buyer will focus on during this process include: Financial and Accounting, Sales and Marketing, Manufacturing and Service, Systems, and Overall Management.

Financial and Accounting

Does the seller have 3-5 years of audited financial statements? Are interim financial reports available (e.g., YTD and a comparison to the prior year)?

There may be adjustments that a larger organization will want to make to the ongoing business. Some adjustments may relate to auto expenses, memberships, and travel. Some of these costs will be eliminated, and closing cost adjustments will be made. All these factors go into the equation of determining the price offered to the seller.

One of the critical managers here is the Treasurer/CFO. During the sales process, the CFO should be asking:

• How accurate are the numbers presented to the prospective buyer?
• How reliable are the forecasts?
• What does the sales forecast or budget show?
• Are the forecasted numbers reliant on one or two key clients based on historical relationships with the founder/owner?
• Are financial margins improving, or have the margins tightened?
• Can others assume the relationships, or will the business revenue decline?
• Can the financial team react quickly and provide projections in real-time?
• What accounting systems are in place, and how quickly can financial reports be generated?
• Will a new accounting system (the buyer’s) be integrated over time?

Sales and Marketing

Will the seller/owner play a limited role after the sale or will they have a consulting arrangement for a transition period? In the latter case, the buyer will want assurances that there are managers with the leadership ability to achieve operating objectives, especially in sales and marketing. This includes management skills to maintain relationships with colleagues, vendors, and clients.

Retaining key managers and other employees requires compatible compensation policies and incentives. Communicating a change in ownership with the current employees and the marketplace is essential to ensure minimal disruption of operations.

Manufacturing and Service

Understanding the nature of the business is critical for the buyer.

For example if the business is in manufacturing the following questions should be asked:

• How does management source raw materials and deal with commodity risk?
• Are there synergies that can be expected once the two companies are merged?
• Are capital expenditures looming, or is the fixed asset base (equipment, land, and machinery) up to date?

For a service business, the buyer will need additional metrics and information to assess the viability of growing the service business. How the internal management team responds to these questions can motivate or turn off the buyer.

Systems

In today’s digital world, the role of a CIO (Chief Information Officer) is an essential function of the management team. A successful merger or acquisition depends on obtaining timely and accurate information on business operations. Reviewing operating systems is critical, and keeping up with data-related technology and security issues has both financial and reputational impact.

Overall Management

If the seller has an inflated price in mind, the negotiations may be a frustration to both parties. The seller may want to engage a financial advisor (including tax and legal advisors) to develop an independent value for the business. A valuation may benefit the negotiations, as it will give the seller a more realistic view and the buyer the reassurance that the price is based on an impartial third-party distanced from the emotional connection to the business that the seller may have.

Other Management Considerations

Talent, Customer Relations, and Intangible Assets

The existing employees will want to maintain current benefit levels (including healthcare) and avoid significant increases in personal costs for such benefits.

In any merger, some job functions become redundant (e.g., a company does not need two treasurers). If some key managers decide not to continue under new ownership, new talent can be recruited.

Typically, a prospective buyer will ask what the current management team brings to the transaction. A team of leaders that have developed the culture within the company, with defined management responsibilities and accountability, will enhance the company’s value to buyers. If the leadership roles are centralized, it could have the opposite effect.

The leadership roles also extend to the market. Relationships with customers and professional advisors as well as deep industry knowledge are all essential for the business to continue to prosper over time under a new owner.

A critical consideration will be how the buyer plans to manage the acquisition, i.e. as a separate unit or a merged business. The seller will have to determine the answer to such questions as:

• Will the corporate knowledge and personal relationships continue if the owner or other key managers depart once a transaction closes?
• If a key manager leaves, will the revenues and return on investment materialize?
• How will the staff react to a new owner?
• Has management engaged with professionals to determine the value of the business based on an independent valuation?
• Does the seller have intellectual property, trademarks, or other intangible assets that add value?
• Does the buyer want the intangible assets as part of a strategic growth strategy?
• Will employees have the incentive to remain and continue to work hard under new management to achieve the goals and objectives of the new company?

Is Your Management Team Ready?

The sale of a company is a complex process. Before embarking on this process and building the outside team of professionals capable of leading a successful sales process, the seller should ask whether its internal operations and management team are in order.

A seller should expect that a prospective buyer will enter into the discussions and negotiations with an open mind while attempting to develop a rapport with the seller’s key managers as it assesses whether the management structure can execute without the presence of its current leaders. To this end, maintaining an honest dialogue with the management team during the negotiations can lead to a successful outcome, both for the seller and the new owners.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Structuring and Planning the M&A Transaction
2. Conducting the Mediation
3. Understanding Risk Management Basics for Business Owners

This is an updated version of an article originally published on April 3, 2015 and updated on November 7, 2023. This article was most recently updated by the Financial Poise Editors.] 

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