We recently asked over 300 private equity investors “What do you look for when buying a business?” As a general rule, private equity groups (PEGs) buy market leaders, companies who rank one or two in their respective sectors. Interestingly, these “best in class” companies have much in common not the least of which are the quality of their management teams and a sustainable competitive advantage. Even if you are not planning a business sale today, addressing these top two concerns of business investors can help improve your bottom line and improve your prospects for any future sale.
Here are steps you can take today to both strengthen your management team and improve your competitive advantage.
BUILDING A QUALITY MANAGEMENT TEAM
Most investors want to partner with talented managers and skilled employees. Many will even require management to remain with the company as a condition of the deal. Some will offer them the option to participate in the equity of the new company or an incentive program in return for their loyalty. The bottom line is this: the quality of a company’s leadership is critical. And that doesn’t just mean the company’s owner/president: it includes the executive team, directors, managers and supervisors. Consider management’s job description: make a profit, create valued products or services at a reasonable cost and provide rewarding employment opportunities. That’s a big job – how does your management team measure up?
Developing and keeping a strong management team must be part of your business strategy. People are a company’s most valuable asset – and finding, attracting and retaining talented management is very difficult for companies of any size. It must be an ongoing initiative.
1. Quality of Management
Begin by hiring people who already have the qualities and characteristics of strong performers. Then make sure the right people are in the right jobs. (You may have learned the hard way that successful sales people are not always successful managers.) Finally, invest in training managers to become strong leaders.
2. Knowledge of Industry
Your management team must know your industry. However, competence is more than just expertise: to be a market leader, you must integrate your company’s skill into a customer-focused solution. Your competitors can match your knowledge, but it’s not as easy to duplicate an enthusiastic management team’s ability to translate know-how into customer service.
3. Input into Strategy and Planning
Share your vision for the company’s future with managers and tie performance incentives to that vision. Then, involve managers in your company’s strategic planning, so they have a stake in the company’s future. Your company will be successful when your management team is excited about the vision and growth potential of the business.
4. Depth of Management
Expect managers to lead the workforce. Give them authority to make decisions – and demand that they refuse to accept mediocrity. While delegating authority is difficult for many small business owners, it is the key to moving beyond a “good enough” culture, to one in which all employees strive to contribute to the company’s success.
5. Compensation Methods
Offer competitive compensation and benefits that are equivalent to that of similar positions in public companies. Provide career opportunities so that managers don’t feel they are stuck in a dead-end job. For most employees, the “number one” career concern is not money, but control over their own destiny.
Ten steps to improve business value