In our work helping business owners plan for and achieve successful exits, we must assist owners in objectively evaluating the quality of the company’s leadership (or management) team. A leadership team plays an essential role in exit success–few if any business owners will reach their personal and professional exit goals if the team is not up to par. For example, some of the ways a leadership team impacts exit success include:
It may be difficult or impossible to grow the company sufficiently large to secure a desired price at sale without a strong leadership team.
Buyers may pay less for a company that lacks a competent leadership team.
Owners who want to secure favorable terms at sale–such as maximum cash at closing without the need to stick around and work for the buyer–must field a leadership team capable of running the company without their involvement.
If the exit strategy is not to sell the company to an external buyer but rather to pass it down to family, or sell it to an internal buyer such as to partners or employees, a strong leadership team is essential for a smooth and survivable transition.
Most owners have deeply-held legacy goals they wish to achieve at exit, goals that likely will be in jeopardy without a competent leadership team in place.
Despite the overwhelming need to assemble and field a qualified leadership team, owners often struggle with this effort. There are several reasons. Many business owners are dynamic entrepreneurs and innovators, but not passionate and focused managers. Leading and innovating is a different skill-set than hiring, developing, and managing. Also, the smaller the company the more likely the owner himself or herself is a key leader, inhibiting the effort to build a team that can stand apart from the owner. Additionally, attracting, compensating, and keeping top talent can be difficult at smaller, privately-held companies. Finally, many privately-held companies foster inclusive cultures that emphasize family-like values, even if it means tolerating mediocre job performance.
There is one more factor that undermines business owners’ efforts to build strong leadership teams–lack of clarity about what a strong team objectively looks like. Many owners are understandably proud of their company’s top employees: they hired these people, work side-by-side with them, and have shared many ups and downs together. In the owner’s mind, it’s a good and accomplished team. However, when a buyer (or perhaps investor) comes along and evaluates the team for itself, sometimes this third-party reaches a different conclusion. If potential buyers do not see, or can not see, the leadership team strengths, then the owner’s exit goals are at risk. Waiting to learn what a potential buyer’s reaction may be is too risky–owners need to know well in advance how to evaluate and prove that they have a strong leadership team. It is not enough therefore to only build a strong leadership team, business owners must also be able to prove it to outsiders.
There are nine ways business owners can objectively evaluate their leadership team, and offer a buyer or successor evidence of the team’s strengths. They are:
Maintain and publish a current and accurate organizational chart. Organizational charts are a foundational tool to illustrate roles, responsibilities, and reporting relationships. Too many companies overlook them, allow the charts to grow stale, or fail to publish them internally.
Maintain biographies of key individuals which document their current experience, skills, and accomplishments. As with organizational charts, these documents often do not exist or are out-of-date.
Leadership positions have documented, current, relevant job descriptions. Businesses need to review and update these at least annually, not simply to keep the documents current, but also to revisit and reset each leader’s top priorities and responsibilities.
Each leadership team member’s job performance is documented against consistently applied benchmarks. This is one of the most commonly overlooked steps. Leadership team members must have clear performance benchmarks, tpyically updated quarterly and/or annually, accompanied by a written record of results.
The right people are in key positions, and no significant holes exist in the leadership team. An outside party should be able to see evidence of this in a fully staffed organizational chart, and the performance records of the individual leaders.
The leadership team has a documented track record of making sound, impactful decisions without the direct input of the current owner(s). A leadership team that waits for the current owner(s) to make all the big decisions is less valuable to a buyer or successor.
Meetings of the leadership team are held according to a set schedule, conducted effectively, and produce clearly defined decisions and outcomes. Meetings are not inherently bad; ineffective meetings are. It is difficult to offer evidence of team strength if the team never works side-by-side, or does not know how to work well together.
Top leaders have formal financial incentives to stay with the company for the long term, up to and beyond a change in current ownership or leadership. Along with #4 above, this is perhaps the most commonly overlooked step. It is critical to note that the financial incentives must extend beyond a change in ownership or leadership, or more harm than good may occur at the owner’s exit.
A back-up/successor CEO clearly exists. If not, the current owner/CEO may not be going anywhere when he or she reaches the desired exit.
Companies that can provide evidence for most to all of these nine elements are well poised to achieve strong growth today, and exit success in the future.
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