Any buyer needs to understand the roles of each member of the Seller’s management team. The buyer will have a due diligence list, and information requests are part of the process which 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 accountability day-to-day, and 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.
Financial and Accounting: Does the seller have 3-5 years’ audited financial statements? Are interim financial reports available (e.g., YTD and a comparison to the prior year)? As a privately owned business, there may be adjustments that a larger organization will want to make in the ongoing business. Some of the adjustments may relate to auto expenses, memberships and travel. Some of these costs will be eliminated, and closing cost adjustments made. All the factors go into the equation of determining a price to be offered to the seller.
One of the key managers is the Treasurer/CFO function. 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 historic relationships with the founder/owner? Are financial margins improving, or have the margins tightened. Can the relationships be assumed by others, 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 buyers) be integrated over time?
Sales and Marketing: If the seller/owner decides to play a limited role after the sale or have a consulting arrangement for a transition period, the new owner will want assurances that there are managers that have the leadership ability to achieve operating objectives, especially in sales and marketing. This includes internal management skills to maintain relationships with vendors and clients. These relationships can include not only the customer side of the business, but relationships with accounting, legal and other professionals. 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.
Manufacturing/Service: Understanding the nature of the business is critical to the buyer. If the business is in the manufacturing sector, how does management source raw materials, deal with commodity risk? Are there synergies that can be expected once the two companies are merged? Are there capital expenditures looming, or is the fixed asset base up to date? 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 question can motivate or turnoff a potential buyer.
Systems: A successful merger or acquisition is dependent on obtaining timely and accurate information on business operations. Reviewing operating systems is critical, and keeping up with technology and security issues related to data has both financial and reputational impact. A key consideration is a review of operating systems (accounting, billing, etc.). In today’s digital world, the role of a CIO in developing a marketing and communication strategy is an important function of the management team.
Overall Management: If the seller has an inflated price in mind, the negotiations may prove to be a frustration to both sides of the negotiation. The seller may want to engage a financial advisor (including tax and legal advisors) to develop an independent value for the business. Having a valuation may benefit the negotiations, as the seller may have a more realistic view, and the buyer understands the price is based on an impartial financial professional, and distanced from the emotional connection to the business that the seller may have, with the seller having nurtured and built the business.
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, how 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 does the current management team bring to the transaction? A team of leaders that have developed the culture within the company, with defined responsibilities and accountability will enhance the saleability of the company. If the leadership roles are centralized it could have the opposite effect. The leadership role also extends to the market, as relationships with customers, professional advisors and knowledge of the industry is critical for the business to continue to prosper over time, as part of a new larger corporate entity, or with a new owner. A critical question is how the buyer manages the acquisition- as a separate unit, or a merged business. Will the “corporate knowledge” and personal relationships continue if the owner or other key managers depart once a transaction closes? What does the future revenue stream look like? 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, etc. 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 work hard under a new management to achieve the goals and objective of the new company?
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 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 attempts to assess whether the management structure is properly organized and can execute without the presence of the individuals that currently are leading the company. To this end, maintaining an honest dialog with the management team during the negotiations can lead to a successful outcome, for both the seller, the new owners.
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