As promised, over the coming months we will be posting various aspects on how buyers think. What motivates an acquirer? We want to share these insights to help owners understand the aspects of a business that a serial acquirer cherishes. By understanding the psychology of buyers and their methodology for assessing, valuing and integrating targets, we hope that private company owners will develop new strategies, accelerate exiting strategies or fine tune the way they run their business to build shareholder value quicker and with purpose. Too many entrepreneurs are building unsaleable businesses that barely cover payroll and have a low probability of long term survival. There’s an easier way to make money AND build a valuable business that is also a liquid asset.
Today’s focus is owner dependency.
Why build a business that just makes money but ignores the increasing risk factors that undermines long term sustainability? Building a business that buyers will love is synonymous with building a long term sustainable business.
Owner Dependency
An acquirer is concerned about many aspects of a target company. The big 3?
- Strategic fit
- Fair price
- The risks associated with managing the target post-acquisition
Owner dependency is at the heart of an acquirer’s worries in number 3. The risks going through the buyer’s mind are clear:
- Will the owner be motivated to carry on after a big payout?
- What skills of the owner does the business rely upon e.g. coding skills, product strategy, business winning, production expertise?
- Is there a succession plan in place?
- Could the business run without the owner?
- How will the owner react to having a boss?
- How will staff react to their mentor moving on?
- Are there specific customers that will walk if the owner leaves?
- What if the owner agrees to a deal on the face of it but creates mischief post-acquisition?
- Is there a danger of the owner starting up again in competition?
Lessons for Owners
The key is to build a business that has a succession plan mindset across the board, not just the owner. It’s also the one area that takes the longest to address so the quicker you jump on it the better. Forget the potential buyers, it’s just risky for the long term sustainability of the business for it to be dependent on one person. Even Warren Buffet and Tim Cook are replaceable!
Here are some tips to help you create that environment.
- Acquire talent with a growth mindset that get stuff done.
- Build a succession plan for all managers including the owner.
- Build as early as possible a company training plan and ideally create a mini university of courses. Teach finance people about sales, building deep product knowledge across customer facing departments.
- Identify skills gaps and invest in the right people to round out their effectiveness.
- Develop Project Management skills across the board which allows you to offer bigger projects over time to your talent pool.
- Expose folk to new challenges.
- Encourage monthly meetings to review performance and that challenges the status quo.
- Consider imposing the one person agenda setter structure – for all employes, only one manager should be capable of setting that person’s agenda. It can as tight or as lose as you choose, but if say a marketing manager has been given list of priorities from the owner, the CFO, the production director and the CRO – you are in trouble.
- Don’t micromanage but don’t leave people alone.
- Consider the difference between job specifications and performance profiles. The latter sets performance targets that are expected from the individual. It works for the CEO down to the assembly worker on the line.
- Build an incentive scheme around every manager developing their successor.
In summary owner dependency is a reality for every startup that ever existed! However to create a transferable business and a safer business, all owners need to work on dependencies as they scale. It’s safer, it builds value quicker and it gives the owner so many more options if one day an exit is a desired outcome.
The Portfolio Partnership has been transforming businesses alongside owners to create remarkable businesses since 2010. Operating partners to SMBs.
