Posted on 16 October 2015
I have been involved in over 50 Corporate Finance transactions and often wondered what the key ingredients are for a successful sale. I have considered business models, routes to market, verticals, depth of purchaser population, all the way through to good old fashion luck? I am sure there are a host of reasons but there seems to be one key theme – succession planning and incentivising management.
I have noticed that those businesses with a wider shareholder base amongst employees are more successful in achieving a successful sale. All the other factors are important so what makes me single this out? – Partly experience, having seen it, and seen how it can transform business, but also there is much logic to it as well.
Firstly, the employees are more engaged. This resonates through to a highly motivated workforce, a more flexible committed workforce and a stronger more resilient business performance. It cannot be that just having an EMI scheme will ensure a successful sale though. Something else is the driver. In each of these type of businesses I have sold I noticed a trait boiling over the surface of the leadership team. They have a philosophy. A philosophy that is engrained and enshrined in the business around employee ownership and employee’s taking responsibility. Such leaders find it easier to delegate roles without losing control. Those leaders provide more responsibility to other management. As a consequence depth is created. A trade purchaser likes depth of experience – it can retained - and that can make an acquisition successful. This is an important factor in selling a business.
Depth also frees up the senior team to focus on the key areas that they should focus on: business strategy and challenging the status quo. Ensuring the business can ride the next economic cycle or position itself to take advantage of an emerging growth markets or even plan for exit.
Most importantly – depth creates another management team. A significant benefit on sale – another bidder. This opens up a much wider buyer population – private equity – and arguably one that has greater certainty of success. It is already known that the management will have a desire for equity as they are already being incentivised and so, even if that key strategic trade purchaser does not materialise, there is another option.
The real challenge in this is for the leadership team to let go. I have seen, all too often, business leaders that have tried to bring in senior management but fail. The leaders complain about not being able to find the right calibre of candidate. The candidate complains about lack of autonomy. Personally, I have always felt that the lack of true delegation is the cause of such frictions. The owner needs to let go but can’t – it is easy for the candidate to be undermined with staff and this often happens. The leadership team need to find a way of controlling without constraining and perhaps this is the crux of the issue - it is a very difficult balance.
If you ask the most prolific of investors about what makes a good investment it is almost unequivocally management. In such transactions each member of the team will be incentivised. They need the other aspects: luck, strong business model, strong buyer population etc. However, it is perhaps management, and good quality advisers!, that make the difference. I see a great deal of logic in developing the right culture and incentive plan as part of designing an exit plan. Fundamentally it should improve the business and therefore improve the value of the business.