Management Strength and Depth

November 7, 2013
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Studies show that for most private business owners, the value of their business is a strong majority of their overall personal assets. Therefore it is critical that owners drive the value of the business up. How to do that?

DVIRC has developed a Value Components Assessment that identifies 28 key drivers of business value and scores a business on each of the components. It gives an overall score, compares it to a growing database, and provides a few recommendations that will best drive business value up.

In our first newsletter, we talked about the finance component of the assessment. For most business owners, it is obvious that finances, especially the cash flow the business generates, are key to determining business value. This article will talk about a less obvious generator of business value—the strength and depth of the management team.

We can best illustrate the importance of management strength and depth by telling a story. A DVIRC client we will call Jim (not his real name) was interested in selling his business. Jim had done a very nice job with his business, as it was growing and thriving. He had defined a particular niche that made it difficult for competitors to get at him. DVIRC thought he would attract many interested buyers. One potential buyer said he had examined the company and thought highly of Jim and his company, but he was not going to tender an offer. Why? The buyer said that in his opinion, Jim effectively was the company. In other words, Jim knew the customers intimately, he knew the technology thoroughly, and he had the very high loyalty of the employees. The buyers were afraid that with Jim’s exit, certain critical technical knowledge, key customer relationships, and even important employees might go with him. If that did happen, then the cash flow the buyer would otherwise count on would go, too.

The key to business value is that it is sustainable and transferable. The business value is lower, perhaps significantly so, if the owner or top salesman account for a disproportionate amount of the sales. What happens to the business if that top salesman gets hurt or dies?

The business value is also lower if key technical knowhow and expertise reside solely with the owner or one or two others in the company. What happens to the business if that person suffers a sudden disability that pulls them away for a long period of time?

In general, if knowledge and key responsibilities are centered on very few individuals with very little or no cross training the business may not be sustainable and may be transferable only at a severely discounted price, which no owner wants. Similarly, if the management structure is not clearly defined, if roles and responsibilities are not clearly defined, if there is a lack of tenure and experience in the management team, or there is no succession or development plan, the cash flow may not be sustainable or transferable.

Aside from affecting the business value based on current cash flows, insufficient management strength and depth have another very negative outcome: they restrict growth. At some point, the key leaders upon whom the business depends get tired, and after all, there are only so many hours in a day! It is very common for DVIRC to hear from owners that they are tired—they cannot (or do not want to) sustain the pace that got them to a certain size level.

Accordingly, the above factors are heavily weighted by the Value Components Assessment. Please let DVIRC know if you wish to discuss these further. Better yet, schedule a complimentary Value Components Assessment of your business to learn how you can improve the value of your most important asset.

For more information or to schedule your Value Component Assessment – call 215-552-3800 or send email to info@dvirc.org.