3 Reasons Exiting Owners Need to Develop Their Management Team

Having a strong management team in place will improve a business owner’s exit strategy. However, some owners may not have a well-defined exit plan and may have stalled on the development of their management team. Even if they don’t yet have a formal exit plan, business owners should continue to devote time and effort to the succession of their management team. No matter what exit strategy you ultimately pursue, your successors can make – or break – the deal. Here’s a look at the reasons why.

1. If you go the private equity route, having a strong management team may yield a higher multiple. The M&A market is currently flooded with private equity funds looking to acquire companies to add to their portfolios, but not all of them want to run the day-to-day operations of the businesses they acquire. If an owner/operator is looking to retire, a private equity company may value the business using a smaller multiple, based on the possibility that the seller’s departure could cause uncertainty about the sustainability of future earnings. Having a strong management team already in place provides a private equity buyer a sense of security that there will be less disruption when the seller transitions out of the business.
2. In an MBO, a strong management team can help preserve your company’s legacy. On the other hand, some owners are reluctant to sell to third parties because they fear what will become of the company and its employees after new ownership takes over. A Management Buy-Out (MBO) provides comfort to the seller that the company will continue on its current track. The management team the business owner has developed over time will continue to carry on with the same mission that the departing owner, and even past generations, have pursued in the past.
3. In an ESOP, a strong management team can help ensure steady future cash flows. Similar to an MBO, an Employee Stock Option Plan (ESOP) is also an exit strategy which requires a strong successor management group. Much like an MBO, the backbone of a successful ESOP is a well-developed management team that can continue to perpetuate the business after the selling shareholder departs. Since ESOP transactions are valued on the company’s ability to produce future cash flows, it is critical for a profitable company to maintain its steady cash flows to ensure the ESOP’s success. The key difference with an ESOP-owned company is that the ownership is transferred to a trust for the benefit of all employees, whereas an MBO provides direct ownership to a select management group.

The common theme of the above options is that a company is sturdier and better positioned with a well-developed management team in place well before the owner’s exit. A solid management team also provides the owner a broader set of exit channels to consider, and with more options, the owner will be better positioned to select the choice that best suits his or her needs and goals.

Brian J. Sharkey is a Director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.  

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