Any buyer needs to understand the responsibilities of each member of the Seller’s management team positions. The buyer will have a due diligence list, and information requests are part of the process that can lead to a sale. Potential buyers will want timely, accurate information.
While the business owner plays a significant role in the negotiations, having a well-developed management team with specific responsibilities and day-to-day accountability, specifically during this process, is very important. The critical question is: “Can the management team execute the business strategy once the business has been sold, absent one or two of the key managers (i.e., owner)?” The answer to this question is hopefully, “Yes.” The test of whether an owner can honestly answer this question in the affirmative is no more clear than during the sale process.
There are five areas of due diligence for consideration as an owner attempts to answer the issues and questions raised during the sale process: Financial and Accounting, Sales and Marketing, Manufacturing/Service, Systems and Overall Management.
One of the key managers is the Treasurer/CFO function. During the sales process, the CFO should be asking:
Keeping key managers and other employees requires that the compensation policies are compatible, and incentives to retain key employees are in place. Communicating a change in ownership with the current employees and the message conveyed to the employees and the marketplace can be important to ensure minimal disruption of operations.
For a service business, the buyer needs additional metrics and information to assess the viability to grow the service business. How the internal management team responds to these questions can motivate or turnoff a potential buyer.
While price is an important factor, there may be other issues and considerations that the seller wants to have maintained, once the transaction closes. The new owner may want to consolidate operations, so keeping local jobs can be important. The structure of a transaction may be critical to minimize tax issues for the seller and to deal with bonuses or profit sharing plans or other benefits. The existing employees will want to maintain current benefit levels (including healthcare), and not face significant increases in personal costs for such benefits.
In any merger, there are some job functions that are redundant (e.g., a company does not need two treasurers). In the event some key managers decide not to continue under new ownership, 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 value of the company to buyers. If the leadership roles are centralized, it could have the opposite effect. The leadership role also extends to the market. Relationships with customers, professional advisors and knowledge of the industry are all essential for the business to continue to prosper over time under a new owner.
A critical question is how the buyer manages the acquisition—as a separate unit or a merged business. The seller may have to determine the answer to such questions as:
The sale of a company is a complex process. Before embarking on this process and building the outside team of professionals that are capable of leading a successful sale process, a selling company should ask whether its internal operations and management team positions 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.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Structuring and Planning the M&A Transaction and The M&A Process: Understanding the Lifecycle of a Deal & Basic Deal Documents. This is an updated version of an article originally published on April 3, 2015.]
Mr. Apperson is a Managing Director of Avalon Group, Ltd., and co-head of the firm’s alternative energy and clean technology sector investment banking practice. His experience and expertise include storage technologies (such as batteries), energy efficiency, liquid fuels (biomass to ethanol), solar, water, wind, and other related technologies. Additionally, Mr. Apperson has a substantial background…
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