Blog

Our perspective on a wide range of topics, including market strategy, valuations, and capital markets.

Maximizing Value Through Building a Management Team

Understanding why a strong management team adds value is straight forward – it reduces risk for the buyer. The team that is running the business, will still be running the business after the deal is done. We have found that most of our clients understand this at some level. Unfortunately, entrepreneurs still wear too many hats. “It is easier than training someone else;” “I couldn’t find anyone good;” “I just don’t trust anyone else to get it right” are some of the frequent comments we hear from entrepreneurs. For a buyer this is a substantial risk. What happens the moment the entrepreneur walks away? Even the most stringent reassurances that the seller will “be available anytime” is still no easy comfort.

How much value the team adds varies based on the type of buyer. If the buyer already owns 20 stores in your region, and has a terrific district manager / Ops team, the lack of a team will matter less (we call these strategic buyers). Obviously, there are a finite number of buyers who will fit that profile. Most individuals, and financial buyers will place substantial value on the team. The process will yield the best possible results for our seller if we can have every buyer type bidding the highest value possible. The strategic buyer may still be the highest bidder but having the other buyer types bidding in the process will force everyone to submit stronger offers.

The strength of your team also adds credibility to a growth story. Buyers pay more for a business that has the potential to grow. In this context that could mean, growing car counts, growing the average ticket, but also growing store count. If the buyer is looking at the opportunity as a potential growth platform, they want to know that your team has the capability of managing a larger operation. Potential growth maximizes value as the buyer is not simply buying the current steady cash flows, they are also willing to pay for some of the increase in cash flows.

Where should you make your investment in the team? Operations vs Finance

Finance

Pros: The financials need to be trustworthy. Ultimately, if there is any question regarding the accuracy of the financial statements buyers will pay less for the company.

Cons: Most buyers, both financial and strategic, will have employees, or will be able to hire an employee to do this function. Buyers will pay no premium for the sophistication of your capitalization, or debt structures, principally because these are not assumable.

Conclusion: Hire a strong controller / bookkeeper. If your organization grows to over $2 million in EBITDA, get your financials reviewed by an external accounting firm each year. If the company grows to over $5 million in EBITDA, get the financials audited by an external accounting firm each year.

Operations

Pros: Strong management leaders within operations add value to the company by maximizing EBITDA, adding credibility to your growth story, and reducing the operational risks/liabilities (fewer skeletons in the closet)

Cons: Good operations staff is expensive, difficult to find, and require time sufficient to prove their capabilities.

Conclusion: If it is an either-or decision, invest in your operations team. Get the strongest team possible, they will maximize your cash flow while you own the asset, reduce your workload, and every buyer type will view them as a major value add in their evaluation of the company.