In an earlier blog post, we talked about what a manufacturing business buyer wants to see in a potential acquisition. We alluded to the risk of information and skill concentration in your employees, but we need to make it clear that this risk is most significant at the top of the organization. More importantly, it's a risk that often convinces a buyer to pass you up for a more attractive acquisition. If a buyer decides to make an offer it may be lower than you expected because they don't believe the business can thrive without you. It's up to you to start building a business that can continue to prosper when you are gone, and you should begin that process before actively trying to sell your business.
Every experienced manufacturing business buyer understands that you have made significant sacrifices to achieve your success. When emergencies arose, or when business was booming, the demands on your personal time were significant as your employees relied on your leadership to steer the business through those challenges. It feels great to be in charge, but have you ever thought about how an overly involved leadership style might be a business risk? Even if you have key man insurance, a claim won't cover the loss of knowledge that resides in your head alone. This is a concern for every qualified manufacturing business buyer, and they remain alert for signs that you might be a “helicopter CEO” who micromanages the business just like those helicopter parents who never let their children make a decision for themselves.
Identify the Dependencies
The first step in building a strong business that can survive your absence is to identify all the ways your business depends on you for action or decisions. Here are some prompts that can help you build your list.
1. How do I spend my workday?
- As the CEO, do I still spend significant time on the shop floor, looking over the shoulders of my employees?
- Am I involved in every pricing or design decision?
- Am I the only one who can work up a quote and talk to potential customers?
- Do I approve every outgoing purchase order?
2. What tasks am I uniquely qualified to do?
- Are you really the only one who can do this, or is it a confidentiality issue?
- Is there an employee you can train and trust to step up for these tasks?
3. Do I cling to other tasks because I have always enjoyed doing them?
- Are you still hands-on because you are nostalgic for your early days as a machinist?
- Your business has been such a huge part of your life. What outside activities can you pursue that will give you the same enjoyment?
4. Am I fielding phone calls from staff while on vacation, during family meals and on weekends?
- Can you establish and enforce clear rules for what constitutes an emergency that requires these intrusive calls?
- Can you ask the staff to divert their questions to email? Tell them you will respond within a specified time period to wean them off the need for immediate responses.
- Your answers to these questions will point out where you have work to do to get ready to sell your business.
Take Action
To mitigate the risk that your business may not survive or thrive in your absence or retirement, you must take time along the way, long before you decide to retire or sell. This goal should be addressed from several angles:
- Organizational Structure
- Standardized Documented Processes
- Checks and Balances
Organizational Structure
There is no need to create a large team of middle managers, but there is also danger in delegating all authority to a single second-in-command. The key to doing this effectively is to consider each major business function (production, sales, financial, HR, etc.) and specify who can take over the bulk of the decision-making in each area. Then, specify what needs to be escalated for your approval or evaluation. Incentivize these managers with some variable compensation based on profitability, not just revenue.
Standardized Documented Processes
After capturing these roles and responsibilities in an organization chart, ask the managers to work with their teams to document their standard operating procedures. This makes a business less dependent on those managers. They can use a combination of simple flow diagrams and detailed written steps. Seeing such documentation gives potential buyers some comfort that the business can run well after sell your business. The documentation effort is likely to require significant time and effort, so it's best to have standardized procedures in place long before you consider the sale of your business.
It's not enough to have documented processes. They need to be systematic and efficient processes. For example, the acquiring entity will have the ability to look at your quoting methodology going back several years. There MUST be a logical system that an acquirer can follow so that they can provide continuity to your customers through the transition period. Preferably, there are others in the organization that can both do quotes and speak to customers.
Checks and Balances
No one can expect you to pull away from your business without having reliable leadership in place. In some cases, there is a loyal second-in-command that can step up, but if you sell your business to an outsider, the buyer will want to install its own CEO. This CEO will need to rely on the judgment of the people you left behind — your departmental managers. Help your people manage the transition by delegating to them as much responsibility as you can. Start this process long before you engage a buyer. One of your primary goals right now is to mentor them so that they can continue to help grow the company without you.
We talked earlier about establishing approval limits for actions within a particular business function, but many issues and questions land on your desk because they impact your business across multiple departments. Be sure to clarify when a decision needs agreement across several departments. Many business decisions require input from finance (with an eye on profitability) and sales (with an eye on revenue) and production (with an eye on feasibility and efficiency). You can lead your managers into the required collaborative decision-making gradually by soliciting input from their perspectives, even when you have a clear view from all perspectives in your head. This will give you confidence in their ability to agree on the right course of action when you are gone. The next step is to ask them to present their agreed upon solutions to problems to you for final approval after they summarize the pros and cons from all perspectives. This is what a new CEO will expect from them.
Conclusion
Preparing your business to run well in your absence has a two-fold benefit. It allows you to ease into retirement while before you try to sell your business. Your buyer will have an extra level of confidence that the business will continue to thrive without you and that confidence will be factored into the terms of their offer.
At Accelerated, we work with a fully vetted list of qualified manufacturing business buyers. Time and again, we have encountered incredible difficulty selling businesses that are highly dependent on the Seller. If they do sell they sell at far less than similar businesses that have key personnel in place who can perform the same functions as the owner. We can give you a buyer's perspective on where the risks are in your business as a potential acquisition, and we will continue to be your trusted advisor along every step of the way to your successful closing.
As we have discussed in a previous article (What Makes Manufacturing Companies Successful? The Same Things Make Them Easy to Sell) remains true today.
If you have additional questions, contact us at info@acceleratedmfgbrokers.com.