Eubel Brady & Suttman Asset Management, Inc

Do you know what your business is worth through the lens of a knowledgeable buyer? Would it have a materially higher value if you are willing to continue applying considerable time and energy to the business, or is the value comparable if you chose to exit at the time of sale? Is it possible that if you were not devoting your daily energy to the business, your business may only have a liquidating value which might even have a net wind down cost and therefore, a negative value? Business owners are confused, or in certain cases, shocked to find out that professional investors conclude their business is worth little without the owner/operator or a strong majority of the management team being contractually committed to staying on after a sale.

In this succession update, we will focus on the reasons why business owners may get a rude wakeup call when they find out what their business might be worth as opposed to their perception of its value. Perceived value can evolve from a subjective source, which like trying to build on sand, can result in an unfavorable outcome. For example, a reliance upon the opinion of a friend or relative who lacks insights into the complex subtleties of business valuation, can result in disappointment and frustration for an owner. These feelings arise once they realize that a more realistic informed opinion results in a value range materially lower than the emotionally or subjective perceived value.

The top priority in establishing a purchase price range for most buyers comes down to the perception of long-term cash flow. Specifically, the buyer forms a belief of the specific level of cash flow the company can produce if they make a purchase. This perception of expected cash flow will depend to a great degree upon the buyer’s personal behavioral lens. A committed and enthusiastic management team with a proven record of stewardship over the capital entrusted to them is a strong positive in obtaining a premium price for the business. A portion of the management team, for example, human resources, finance, and/or technology, does not have to come from a pool of industry insiders that bring technical expertise that is industry centric. However, key leadership positions are essential to the maintenance and growth of the value of the business. By the nature of their experience and the relationships they have developed in the industry, specific members of the management team will be “must-haves” by the buyers.

The priority and challenge are to convince the buyer that the management team is a quality team, and to weave together a story as to how they can execute to deliver a company that grows in value at rates that exceed the results of key competitors. It may be difficult to convince a well-prepared buyer that a key manager or the entire management team is of the highest quality unless the existing internal team has the utmost confidence and belief in the leaders they are working for to deliver premium results on a daily basis.

Usually, a prospective buyer looking at a company producing excellent results with a long-tenured team will have confidence in the leadership and management of the company. However, this will not always be the case. Strong middle managers or supervisors could be the stabilizing force for the overall team. Gaining insights into the level of commitment and trust towards the competence of your key managers is a critical step in preparing for maximizing the value of your company. A variety of engagement surveys that contain candid insights from your team is a valuable input that, when deemed credible, can go a long way to earning a buyer’s trust, therefore justifying a premium price for the business.

It is hard to think of too much that can go wrong if you are making your business more valuable to a buyer each year. Strengthening the team means making tough decisions that will lead to under-performing managers choosing to self-exit while others may have to exit at the initiative of the leading decision maker. If this is a relative or close friend of the decision maker, it is never an easy decision. Other leaders could possess the natural behavior that enables them to deal with these issues more promptly than someone with a family or a deep friendship that is presently in a leadership seat. The complications of having to make a change for the good of the business is an easy one to procrastinate upon, even if objective data from your team points to the need for a change.

Next time, we will discuss why the short-term turmoil of failing to make a change more often than not harms the business, its economic value, and culture. Equally important, the risk of greater harm to an individual’s long-term satisfaction with their career path and their image of their own self-worth rises with each day of procrastination.

Information presented is for educational purposes only and should not be construed as a recommendation.