One of the fundamental issues with many privately held businesses is the fact that they are completely dependent on their owners for success far too often. Let’s face it – most entrepreneurs are geniuses at what they do. In fact, if you are the owner of a business that is still in operation today, having survived the worst recession in 80-plus years, you deserve a huge pat on the back. Being in business today requires nerves of steel and a stomach of iron.
Having said that, the truth is that one day you will eventually exit your company. When you get to that point, if your business is totally dependent on you for its ongoing success, you will have a challenge finding buyers who will pay you a premium for your company.
This concept was demonstrated a few months ago when a lower middle-market equity firm, Milestone Partners, announced it was raising its fourth fund in order to invest in smaller companies. For their third fund they raised $240 million dollars in 2008 and, according to their portfolio page, invested in nine companies. But what caught my eye on their website was this comment found in the investment criteria section:
“We will invest only when proven management teams with demonstrated records of success are part of the opportunity.”
Notice that this statement is plural. They look for management teamS. I capitalize the “s” to emphasize a point every small business owner needs to realize: If you aren’t developing and grooming a cadre of managers to eventually replace you, you better start soon.
Professional buyers look for companies that are diverse in their dependence on key people. Businesses that rely on their owners simply do not command a premium in the market. And, in fact, what you will often find is that most of the dollars in the deal will be in the form of an earn-out.
For those of you unfamiliar with the term, an earn-out is a deal structured where a portion (sometimes a significant portion) of the purchase price is contingent on future performance. It is typically payable to sellers only when certain pre-defined levels of sales and/or income are achieved post acquisition.
If your company is dependent on you, a buyer may require you to stay on board to help the business reach the revenue and profitability goals that you provided in your offering memorandum. If you don’t achieve them, you get paid less. And you will still be working hard, maybe harder, than you are now. Is that what you want after you sell your company? Most folks would say no, that they want to move on after they sell.
The only way to realistically move on is to develop a middle-management team. Here is an exercise we encourage many business owners to do: Sit down and list your key employees. Describe why they are vital and discuss the skills that make them so. Also list their weaknesses and what they need to improve on.
If you have trouble filling out this list, chances are good that you haven’t developed a good set of middle managers to replace you. Again, if this is the case, you need to start developing a team today that can keep the business growing upon your departure.
Successful succession planning is a real challenge for many entrepreneurs. But it is vital. Fortunately, Generational Equity is here to help. We have been working with business owners for years to successfully exit their companies.
The first step in our proven process is to conduct a thorough evaluation of your company. One of the key areas we examine is your succession plan. If you don’t have one, we will give you some ideas on why you need to create one and how a lack of one might impact the sale of your company.
If you are planning to eventually exit your company, you need to develop a well-thought-out and documented succession plan. To start, you need to hire and groom successful people who can replace you. These people should form the backbone of your company, giving potential buyers a comfort level that the business will succeed when you are gone.
Don’t let your ego get in the way. You are most likely a great business owner and a genius at what you do. But you will need well-groomed middle managers if you want to find an optimal buyer who will pay a premium for your company.
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We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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