Adding Value by Broadening Management Responsibilities

Senior Associate Leland Clemons joined Kasper & Associates in 2012.  His expertise in strategic planning provides a unique perspective for business owners charting the course toward a successful business sale.  He’s written the following article addressing how taking steps to develop a solid management team can improve operations and increase a company’s value.

Anyone interested in discussing these ideas can reach out to Leland directly at clemons@kasperassociates.com.  

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Adding Value by Broadening Management Responsibilities

CEO/Owners are actively engaged in all aspects of their respective businesses. As founders, their vision, sacrifices, capital and talent have nurtured companies through wide ranges of economic challenges in achieving success. Many owners perceive that their companies would enjoy the greatest success if they could just clone themselves at different management and supervisory levels. But when it comes time to value the company for sale or third party recapitalization, owner involvement in management decision making, planning and oversight may actually serve to place limitations on a company’s value from the perspective of a potential purchaser or investor.

Conceptual Change from Value for “Me” to value for “Them”

While reducing management responsibilities may seem counter intuitive in creating company value, it sends very positive signals to a prospective new owner regarding future growth and performance prospects. It is that “perception of the goals of new ownership” concept which often serves as a stumbling block to the founder in maximizing the potential value of his respective company’s sale or recapitalization.

Allocating less time to the direct decision making process and more time in mentoring and training may not have the same hands-on, critical feel. But it is a perspective change imperative to optimizing the company’s value to others.  It is a conceptual transition from, “What has made this company successful in the past” to, “What may be perceived to make this company successful going forward” – with third parties having different capabilities and potentially different plans for the business’s success. It is an oversimplification, because each circumstance represents different characteristics – but the more engaged a company’s entire management team and supervisory personnel are in the broader integrated elements of overall management and planning, the more valuable that management group is perceived to be by third parties, who will evaluate management as they would other tangible assets.

Just as an owner of a manufacturing company would strive to maximize the production efficiency of its equipment or a service company would seek to cross-sell its capabilities to the broadest range of customers, pushing the owner’s operating knowledge, planning and decision making authority down the organizational chart increases sustainable value. Encouraging creative and diverse input and problem solving from the greatest number of managers and supervisors supports a more vertical growth and profitability trajectory from the perspective of a potential buyer or investor. Expanding and diversifying management authority also reduces potential as well as perceived risks associated with the loss of individual management members upon sale of the company.

Create Transferrable Value in Your Management Team

From a purely economic standpoint, a buyer/investor may justify a more aggressive CAP rate for his purchase if he believes managers representing a full complement of responsibilities are capable and motivated to support his own vision for future growth. With very few exceptions, the first pre-acquisition meeting a buyer will have with the company’s managers, is to assure them of his desire to grow the company, build on their past successes, support their own careers, etc. The purpose of a second meeting with those same managers likely will be to assess their capabilities and knowledge of the company. Before they buy the company and as they are contemplating their purchase or investment, buyers realize that these meetings are among the most critical they are going to have in assessing management depth, experience and talent.

It is also assumed by the new owner, that regardless of any management or consulting transition contract between buyer and seller, a seller’s role is to facilitate his own exit, not to grow the company. Under new leadership, that will fall to his existing management team and supervisors. How well prepared are they for the new challenge? And has the owner promoted that preparation in a manner which yields maximum compensation for his efforts?

Delegating and expanding non-owner management team responsibility creates incremental and sustainable value.