The Importance of Management Teams in M&A
Updated: Jun 13, 2019
For all the financial analysis and due diligence that goes into mergers and acquisitions, business owners too often overlook the importance of management personnel.
Before selling a business, there is enormous value in developing a robust management team and ensuring the company has longevity under new ownership. Because if an owner controls all aspects of the company, there is more risk for a buyer—and in turn a lower valuation for the seller.
Life after the owner
Sellers should isolate and evaluate the specific responsibilities of every member of the management team and understand how those duties may evolve through a business transaction.
Buyers will want to know about potential pitfalls, including “ownership risk,” so it’s important to have a strategic plan in place. Can the selling company have life after the current ownership and, if so, how will it look? If the owner is core to the business and suddenly dies, what happens?
It’s often difficult for longtime owners to untangle themselves from the day-to-day operations of their business, but it’s a critical task in order to complete a transaction and position the company for long-term success.
Sellers should consider who oversees customer and supplier relationships. If the owner closely manages those relationships, then he or she is mission critical to the business and a hand-off plan should be carefully constructed. Build out a management team that is responsible for key activities and which has demonstrated they can execute effectively. This serves to support a smooth transition and also increases value for an owner.
Equally important is getting the management team involved early in the process and then at the table with buyers to ensure everyone understands who does what, and how they do it. Otherwise, it can be a red flag for a selling business owner to exclude certain managers and employees from talking to a prospective buyer.
Beyond the management team, discussion of a potential sale should be handled discreetly and an owner should think about controlling the message to the employees of the company. Most often we see this occurring once a sale has been completed, but in some cases it may have to be addressed during a sale.
There’s potential upside for top management in a transactions, with some sellers offering incentives to ensure management stays on through a transaction. And depending on the buyer, there may also be opportunity for ownership.
Executives say integration leadership is among the top three things that could be improved in their overall integration approach, according to a recent McKinsey report. A separate study by EY found one of the most common reasons for M&A failures was poorly managed integration of people and culture.
The bottom line for sellers is that ownership risk can affect the value of a company, and it’s clear that a robust management team has transferable value.
Be as proactive as possible before and throughout the transaction process. Get out in front of the potential pitfalls and don’t be among those sellers who wish they could’ve better prepared their business for life beyond their own involvement.
Matthew Roberts is Vice President at Copper Run. He specializes in the business services, distribution and manufacturing sectors.