One of the fundamental issues with many privately held businesses is the fact that they are completely dependent on their owners for success far too often. Let’s face it – most entrepreneurs are geniuses at what they do. In fact, if you are the owner of a business that is still in operation today, having survived the worst recession in 80-plus years, you deserve a huge pat on the back. Being in business today requires nerves of steel and a stomach of iron.
Having said that, the truth is that one day you will eventually exit your company. When you get to that point, if your business is totally dependent on you for its ongoing success, you will have a challenge finding buyers who will pay you a premium for your company.
This concept was demonstrated a few months ago when a lower middle-market equity firm, Milestone Partners, announced it was raising its fourth fund in order to invest in smaller companies. For their third fund they raised $240 million dollars in 2008 and, according to their portfolio page, invested in nine companies. But what caught my eye on their website was this comment found in the investment criteria section:
“We will invest only when proven management teams with demonstrated records of success are part of the opportunity.”
Notice that this statement is plural. They look for management teamS. I capitalize the “s” to emphasize a point every small business owner needs to realize: If you aren’t developing and grooming a cadre of managers to eventually replace you, you better start soon.
Professional buyers look for companies that are diverse in their dependence on key people. Businesses that rely on their owners simply do not command a premium in the market. And, in fact, what you will often find is that most of the dollars in the deal will be in the form of an earn-out.
For those of you unfamiliar with the term, an earn-out is a deal structured where a portion (sometimes a significant portion) of the purchase price is contingent on future performance. It is typically payable to sellers only when certain pre-defined levels of sales and/or income are achieved post acquisition.
If your company is dependent on you, a buyer may require you to stay on board to help the business reach the revenue and profitability goals that you provided in your offering memorandum. If you don’t achieve them, you get paid less. And you will still be working hard, maybe harder, than you are now. Is that what you want after you sell your company? Most folks would say no, that they want to move on after they sell.
The only way to realistically move on is to develop a middle-management team. Here is an exercise we encourage many business owners to do: Sit down and list your key employees. Describe why they are vital and discuss the skills that make them so. Also list their weaknesses and what they need to improve on.
If you have trouble filling out this list, chances are good that you haven’t developed a good set of middle managers to replace you. Again, if this is the case, you need to start developing a team today that can keep the business growing upon your departure.
Successful succession planning is a real challenge for many entrepreneurs. But it is vital. Fortunately, Generational Equity is here to help. We have been working with business owners for years to successfully exit their companies.
The first step in our proven process is to conduct a thorough evaluation of your company. One of the key areas we examine is your succession plan. If you don’t have one, we will give you some ideas on why you need to create one and how a lack of one might impact the sale of your company.
If you are planning to eventually exit your company, you need to develop a well-thought-out and documented succession plan. To start, you need to hire and groom successful people who can replace you. These people should form the backbone of your company, giving potential buyers a comfort level that the business will succeed when you are gone.
Don’t let your ego get in the way. You are most likely a great business owner and a genius at what you do. But you will need well-groomed middle managers if you want to find an optimal buyer who will pay a premium for your company.
© 2012 Generational Equity, LLC All Rights Reserved
it all started with a conference.
start your story today,
speak directly with one of our senior advisors +1-972-232-1121
The information we learn from customers helps us personalize and continually improve your experience. Here are the types of information we gather.
We receive and store any information you enter on our Web site or give us in any other way. We do not sell or rent your personal information to others without your consent. We use the information we collect only for the purposes sending promotional information, enhancing the operation of our site, serving advertisements, for statistical purposes and to administer our systems. We DO NOT use third parties to provide customer service, to serve site content, to serve the advertisements you see on our site, to conduct surveys, to help administer promotional emails, or to administer drawings or contests, but reserve the right to do so in the future without advance notice.
By submitting my name electronically and clicking the “submit” button, I understand that I am providing Generational Group, Inc., Generational Equity, LLC, Generational Capital Markets, LLC, DealForce LLC, their affiliates, representatives, contractors, etc. (“Generational Group”) my telephone number, which may include a number that is wireless and/or a number that is on a national, state, or other Do Not Call registry or list. I hereby consent and agree to receive telephone calls including any autodialed and/or pre-recorded telemarketing calls and/or text messages (telemarketing) from or on behalf of Generational Group at the telephone number provided. I further consent and agree that telephone calls may be made using automated technology such as an automatic telephone dialing system, artificial or prerecorded voice, or SMS text messaging. Consent is not a condition of purchase. I further warrant and represent that any telephone number provided is not on any state or national Do Not Call Registry and that by agreeing to these terms and conditions that if any number provided is on any such registry, I hereby consent and agree to receive telemarking calls and/or communications including any phone calls, text messages, URLs, links, emails, etc. to the telephone number(s) and/or any e-mail addresses provided. I understand that by entering my name in the electronic form provided, that I am signing my name as equally as if it was my handwritten signature and that it is my intent to provide an “electronic signature” as that term is defined in state and federal law, as well as industry practices for e-commerce.
For reasons such as improving personalization of our service, we might receive information about you from other sources and add it to our account information.
Generational Group may license the use of its intellectual property including but not limited to its name, likeness, and logo for the use of affiliated offices. Such affiliated offices may not be owned, controlled, managed, supervised or staffed by employees, officers, or agents of Generational Group. Affiliated offices may be independently owned and operated. For more information about a particular office, please contact Generational Group at its office in Dallas, Texas.
This page may contain other proprietary notices and copyright information, the terms of which must be observed and followed.
Information on this web site may contain technical inaccuracies or typographical errors. Information may be changed or updated without notice. Generational Group may also make improvements and/or changes in the products and/or the programs described in this information at any time without notice.
Generational Group does not want to receive confidential or proprietary information from you through our web site. Please note that any information or material sent to Generational Group will be deemed NOT to be confidential. By sending Generational Group any information or material, you grant Generational Group an unrestricted, irrevocable license to use, reproduce, display, perform, modify, transmit and distribute those materials or information, and you also agree that Generational Group is free to use any ideas, concepts, know-how or techniques that you send us for any purpose.
Our computer system protects personal information using advanced firewall technology.
Information Generational Group publishes on the World Wide Web may contain references or cross references to other products, programs and services that are not announced or available in your country. Such references do not imply that Generational Group intends to announce such products, programs or services in your country. Consult a Generational Group representative for information regarding the products, programs and services which may be available to you.
Generational Group makes no representations whatsoever about any other web site which you may access through this one. When you access a non-Generational Group web site, please understand that it is independent from Generational Group, and that Generational Group has no control over the content on that web site. In addition, a link to a non-Generational Group web site does not mean that Generational Group endorses or accepts any responsibility for the content, or the use, of such web site. It is up to you to take precautions to ensure that whatever you select for your use is free of such items as viruses, worms, Trojan horses and other items of a destructive nature.
IN NO EVENT WILL Generational Group BE LIABLE TO ANY PARTY OR ANY DIRECT, INDIRECT, SPECIAL OR OTHER CONSEQUENTIAL DAMAGES FOR ANY USE OF THIS WEBSITE, OR ON ANY OTHER HYPERLINKED WEBSITE, INCLUDING, WITHOUT LIMITATION, ANY LOST PROFITS, BUSINESS INTERRUPTION, LOSS OF PROGRAMS OR OTHER DATA ON YOUR INFORMATION HANDLING SYSTEM OR OTHERWISE, EVEN IF WE ARE EXPRESSLY ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
Furthermore, all information contained within this website is the property of Generational Group.
Success, you have been added to our list.