The Value of a Good Management Team

Last month, we talked about Management Buy-Outs (“MBOs”) and that key to any successful MBO is the quality of the management team looking to acquire the business from the current owner. However, even with a quality management team in place, an MBO might not be an appropriate option for all business owners when planning for their exit.

Perhaps the management team lack the risk appetite to step into the shoes of the business owner and take on the ownership of this business. Or perhaps the availability of funding is an issue, and the business owner’s valuation aspirations cannot be met through a debt-led sale to the management team.   

Independent of whether an MBO is being considered, a quality management team can make a business a more saleable proposition for a third-party looking to acquire or invest in it. The benefits of having a strong management team can be two-fold.

Firstly, the management team can help drive growth and improved financial performance in the business ahead of any sales process. When the business is then taken to market and offered for sale to potential buyers, the value of the business (which is often calculated as a multiple of the current profits achieved) is therefore enhanced, and the likely sales proceeds for the exiting owner are maximised. In these circumstances, it can sometimes be appropriate to incentivize certain key members of the management team to help deliver this growth by offering them minority share options in the business. This strategy aligns the interests of the management team with the owners, through the sharing of any future upside in value between the parties.

Secondly, once the current owner has exited and their knowledge of the business has left with them, having a quality management team can help deliver sustainable future financial performance under the new ownership. This is a particular risk for any buyer of a business in the owner-managed SME sector, where the owner usually plays a significant role in delivering the current financial performance. If the purchaser cannot get comfortable that future financial performance under their ownership is sustainable compared with historic levels, this risk will usually be reflected in the valuation and price a buyer is willing to pay. Similarly, a buyer may structure the transaction such that a proportion of the sale consideration paid is contingent upon the financial performance of the business post the date of sale. This structure then creates a risk that the exiting owner doesn’t receive the full sale proceeds.

These two points are rarely independent of each other and having quality management can have a compounding effect when it comes to the value of a business. Conversely, the absence of a quality management team can, unfortunately, have the opposite effect when it comes to the value of offers made for a business.

So what roles of the management team are most important? Well, the answer to this question will likely come down to what sector the business operates in. For example:

  • In a business where product innovation and continual product development is key to sustainable financial performance, having a quality Technical Director or Chief Technology Officer is likely to be important. An example could include a software company where the technology is continually being developed to stay ahead of the competition and remain relevant for the customers’ needs.
  • In a sector where there are low levels of recurring revenue streams, having a Sales Director who holds key customer relationships independent of the exiting owner will be important. An example could be a contracting business where a purchaser will be keen to understand how contracts are awarded by customers, and how likely the business is to win new contracts under their ownership.
  • In the manufacturing sector, having a Commercial or Operations Director who understands and manages the supply chain, production facility and the associated logistics, will help ensure efficiencies are maintained and financial performance is continued to be achieved post sale.

At first blush it may be that a Finance Director appears of lesser importance, however, a good FD is required to enable a business to express itself through the numbers.  If a Purchaser cannot ‘see’ the strength of the business through the figures, this is likely to result in a reduction in overall value, either at the outset or through the due diligence phase.

How can MHA Moore & Smalley help?

We regularly work with clients who are preparing their business for sale, sometimes several years in advance of a target transaction date.

If you believe that we could help you with this process, including identifying gaps or areas of improvement in your management team that could add value to you, please don’t hesitate to get in touch and contact our Corporate Finance team by filling in the form below.