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M&A Transactional Challenges Part I – Owner Dependence

By Generational Equity

m & a challenges

Today we begin a series that covers issues that can slow M&A transactions down. Although the causes are many, according to our deal makers who I polled for this series, there are three that seem to create the biggest headaches for buyers, especially professional buyers that look for optimal deals.

Bottom feeders, buyers who are out to buy your company at a discount, are not so concerned about these issues because typically they are looking for assets to acquire that they can turn around and spin off.

If you want to sell your company at a significant discount to a buyer that is out to steal it as cheaply as possible, read no further. However, if you are interested in finding an optimal buyer, one who will reward you for your efforts over the years, you should read this piece and the two ensuing articles to get a good idea about how to effectively position your business for buyer interest.

Today we cover one of the more common issues that impacts deal closings and also valuations: excessive owner dependence.

What’s the Big Deal?

Now, many entrepreneurs do not recognize this for the issue that it is. Many are justifiably proud of the important role that they individually play in the ongoing success of their business. They look at their contributions and say, “Look at what I have accomplished and achieved and see how involved I am in the daily operations of my business!”

From a personal satisfaction standpoint, that is all well and good. However, buyers view this quite differently.

Unless you are planning on staying with the company indefinitely post acquisition (and if you plan on this, you need to be sure you can take orders from the new owners), the business’s dependence upon you can be viewed as an unfavorable issue from a buyer’s perspective.

Again, quite a few of the business owners we meet find this to be tough to fathom. By their very definition, entrepreneurs are a strong lot, being type “A” personalities in many cases, and they can have a tough time delegating decisions to those that report to them. In many smaller businesses this is completely understandable, as instant daily decisions often need to be made on the fly by the business owner.

However, once your company reaches a certain critical mass in revenue, profits, and number of employees and customers, it becomes important to begin delegating key decisions by hiring a team of middle managers who can focus on the day-to-day decisions and leave the rest, the more strategic ones, in your hands.

It is quite refreshing when we come across entrepreneurs who have created a buyer-ready business from day one. Unfortunately this is far too rare.

How can you determine if the business is excessively dependent on you? Pretty easily actually, take a step back and analyze how many decisions you allow your key people to make. If your middle managers have to run everything by you before moving forward, you may have a business that is overly dependent on you.

Key Customer Relations Are Important Too

Another area to examine is your relationship with the business’s clients. How many of those connections and contracts are dependent upon you? How often do you personally have to meet with key clients to ensure long-term work? These are important questions that any professional buyer will ask.

In addition, do you have or have you begun to groom an individual to replace you? If you have someone in mind that is in-house right now, how did you determine that he/she was a good fit? How do you know that they have the skill, temperament, and aptitude to fill your shoes? Again, all critical questions that buyers will ask.

Another test (and I used to do this with clients all the time): If you are asked to create bios and key person descriptions for your management team, would you be able to do so? It never ceases to amaze me to see clients respond to our questions regarding the existing org chart and key employees. Far too often the bios will be only 2-3 sentences long for each key employee. However, the business owner, the person not planning on staying, will have 3-4 paragraphs on his/her skills and background. If you fall into this same trap, you may have an excessive dependence problem.

Remember one thing: In most cases, the buyer is not buying you and your skills. They are acquiring your business and its people. No matter what industry, it all boils down to the skills and abilities of your employees.

Do some self-analysis on this topic. Be honest about your role in the business and how integral you are to its performance. It is OK to be proud of what you have built and how important you were in its creation. However, what about five years from now? Who will be important once you are gone? Who in the organization has the skills needed to take the company to the next level? Remember the sage saying penned by Marshall Goldsmith: “What got you here, won’t get you there.” This means that you may have the skills to start and build a company to $10 million, but who resides in-house to take it to the $20 million dollar level and beyond?

To learn more about Generational Equity and our offerings, please give us a call at 972-232-1121 or fill out a contact form. Visit our website and take a look at the services we provide.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC. All Rights Reserved.

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