Building Business Value Requires Next-Level Management

Submitted by John Brown on Fri, 04/26/2019 - 9:00am
A gray-bearded man in a dark gray suit and red tie standing and leaning across a wooden table, pointing at a notebook with a pencil and looking at a person seated across from him.

In a previous article, we talked about how owners must change their role in the business from hub to spoke to create transferable value. Building business value and transferable value each require the owner to have a management team that can become the hub, growing the company at the pace necessary to achieve the owner’s goals and aspirations. For most owners, this means finding a management team that can drive growth more quickly and efficiently than the owners themselves can.

 This fact is often where owners get most hung up. Where can they find a management team that runs the business better than they do? Some owners sincerely believe that no one can do it better than they can (while this is sometimes true, more often, the owner’s pride blinds them to their own weaknesses). Some owners just can’t find anyone willing or able to do it better than they can (or, they aren’t willing to pay what those managers cost).

Many problems that arise in a search for next-level management are avoidable, but owners don’t know how to avoid them. This is where advisors play a crucial role.

To help owners build value, advisors must help them retain or hire next-level managers. Advisors must also create plans to properly motivate management to grow the owner’s company to allow owners to achieve their goals by their planned departure date.

Do Owners Have to Fire Current Managers to Get Next-Level Management?

Let’s return to our case study involving Carl Foley and his advisor Larry. Under Carl’s leadership over the past 25 years, Foley Steel had grown from two employees to 25 and had EBITDA of $500,000. But recently, growth had stagnated. After taking Carl through the data provided by other expert advisors and completing a Gap Analysis based on those accurate data, Larry showed Carl that he was $4 million short of his financial goal.

Carl reviewed his options and asked Larry whether he could create an Exit Plan that would close that gap in seven years. Before Larry could answer, Carl launched into his concerns.

“So I talk with my principal manager, Eric, about this a lot, Larry,” Carl began. “No matter what Eric and I do, we just can’t get revenues or the size of our customer base to budge. My goal was to create a world-class company, and that just isn’t happening.”

 “You’re in the same spot as many owners I meet,” Larry said. “You’re smart and hard working. You and your best manager have worked at top speed, but nothing changes.”

“I know,” Carl said. “But why? Am I doing something wrong?”

“That’s a tough question to answer, but it might not matter why,” Larry answered. “What matters more is how we fix it. We’ve got to change something if Foley Steel is to grow into the world-class company you want it to be.”

“I agree,” responded Carl. “But what?”

“You need new talent,” Larry said. Before he could finish his thought, Carl interjected.

“Now hold on a second. I’m NOT getting rid of Eric. He’s been too important and too loyal.”

Larry sat in silence for a moment, making sure Carl didn’t have any other objections to vent. Confident that Carl had said his piece, Larry spoke.

“That’s the best part. You aren’t getting rid of Eric at all,” Larry said.

“So what am I doing?” Carl asked.

 “Eric is your hammer,” Larry said. “What you need right now is a screwdriver. But just because you need a screwdriver doesn’t mean you throw the hammer away.”

It bears repeating that transferable value means that management, not the owner, is responsible for future business growth. Usually, advisors must show owners how important it is for management to spur that growth. This includes carefully showing owners that sometimes, their longest-tenured managers aren’t the right people to do that.

The hard part for advisors is that owners must be open to an objective assessment of whether the existing management team can take the business to the next level. In many companies, the management team rises through the ranks, and there’s a strong loyalty between the owner and management. This loyalty can blind owners. In the worst cases, it can cause owners to resist objective assessments of management performance continually and reject best-in-class performance. Outside advisors can be invaluable in ensuring that the company has the best management team to move the company forward, if they know how to broach the topic correctly.

Once advisors have demonstrated to owners the connection between transferable value, their successful exits, and the role management teams play, there are five steps they can follow to help owners act on their advice.

Step 1

Help owners determine whether their current managers can and will grow their companies to achieve their exit goals as quickly as possible. This often means working with a management consultant and the company’s CPA.

Step 2

Explain to owners that professional buyers typically only buy businesses that have strong, capable management teams in place that will remain after owners exit.

Step 3

If an owner contemplates selling to family members or employees, the likelihood of receiving full payment for the business depends on whether the management team can run the company successfully without the owner at the helm. Regardless of the type of successor, capable management that stays with the company after an owner’s departure is the key to a successful exit. Explain this to owners.

Step 4

Recommend that owners create an incentive plan for their managers with the advisor’s help. This incentive plan should reward managers only when they achieve targets that the owner sets. Those targets should be directly related to growing the company quickly enough to let the owner exit the business when they want and with financial security.

Step 5

Talk with owners about the pros and cons of two types of rewards: equity and cash. Which does the owner prefer? Which best motivates managers to do the work necessary to build value as quickly as the owner requires and stay after the owner leaves?

Connecting management performance and rewards to incremental growth targets is a key Exit Planning concept, but one that most advisors don’t tackle every day. To help business owners plan a successful business exit, advisors must help owners find and retain next-level management and involve other expert advisors, the owners themselves, and management to create a structured, coordinated process of creating value.

Takeaways

  • Top-notch, seasoned managers are indispensable. They increase transferable value and close an owner’s Asset Gap because they are responsible for the creation, direction, and rate of growth of all other Value Drivers.
  • Advisors must drive home the need for top-notch management capable of accelerating the growth of the company.

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