08 Mar Building Value: Management and Employees
It may be surprising but there are times when a buyer may value your management team and employees more than your products or revenue. Your key leaders, your research and development team, a strong sales force, or subject matter experts may be the missing piece that they need to penetrate a new market.
A buyer could recruit these resources, but recruiting is an expensive proposition which can take many months, and then they must onboard, train, and build rapport amongst the new hires. Sometimes it is faster and cheaper to buy a good team, already assembled.
Examples of Team Value
Here are a few examples of how a prospective acquirer might value your team:
- Domain expertise – When a buyer wants to launch products in a specific market where they do not have expertise, they need people who understand the industry. Sales, support, customer service, marketing, and channel management differ from industry to industry. If you already have a good team assembled, then a buyer might value that as much or more than the products you are currently selling to that market. This is often referred to as an “acquihire“.
- Thought leaders – Visionaries and market influencers can pioneer new technologies, evangelize customers, and influence entire industries. If you have recognized thought leaders on your team, then a larger buyer with more resources may need a standard bearer. This is particularly applicable when the thought leader is an owner of your company.
- R&D team – The value of an R&D team is measured by the number and quality of the products they produce. If the buyer has a weak pipeline for new products or feels that it is lacking innovation, then acquiring a good R&D team may be the solution.
Building the Value of Your Team
As an entrepreneur and business owner, you make choices that can have a dramatic impact on the value of your team. If you take a strategic approach, then it can have a significant effect on the value of your business when it comes time to sell.
- Defining core-value roles – The first step is to define which roles in your organization are core to producing value for your business and which ones are more of a commodity. Core-value roles are differentiators. Commodity roles may be necessary, but they generally are not accretive to the equity in your business.
- Pick your investments – By investing in core-value roles you are delivering value to your customers in the immediate term and also developing equity in your business in the long-term. Commodity roles are more of a cost-benefit decision and some businesses may choose to outsource them. Acquirers are more likely to consolidate commodity roles.
- Hiring – When hiring core-value roles, think about the equity they are building as well as the day-to-day job they are doing. You have limited funds to invest in staff; some roles you hire at market salaries, some above market and some below market. When you choose where to spend your salary dollars, investing more in the core-value roles generally offers greater returns in the long-run.
- Developing – There is a popular internet meme “CFO: What happens if we train our people and they leave? CEO: What happens if we don’t and they stay?” For core-value team members it is essential that you keep developing them, through training and growth opportunities. If you don’t then their value and the company’s value erode.
- Retaining – For core-value team members, by hiring, developing, and retaining them, you are building equity in the company. Once you realize that, then you may be able to justify salaries, benefits, and potentially stock and/or profit sharing to retain your top performers.
- Transferring – If core-value staff are to be valued as an asset, then you must be able to transfer them to a prospective buyer. So, you need to be selective about what buyers you consider (are employees willing to work for the buyer?), how you communicate a prospective sale to core-value employees, and incentives to those employees to stay through the transition to a new owner.
Bottom Line for the Entrepreneur
Your team is a key part of the value of your business, so you should:
- Define the core-value roles in your organization
- Invest in core-value roles by hiring good people, even if it costs you a little more
- Enhance the value of your team by providing training and growth opportunities
- Don’t make the company all about you, personally. The stronger and more valuable your team is, the better options you will have, both in realizing value at time of sale and in your own personal next steps.
In this series of articles, the Austin Dale Group will distill some of the lessons learned from our many years as M&A and Strategic Growth Advisors to emerging and mid-market technology companies. We will review what acquirers want and how these key factors can have a dramatic impact on the value of a company to shareholders and acquirers.