For owners of closely held businesses, planning for the ultimate transition of ownership is critical to the long term health and profitability of the organization. One of the most important components of the planning process is the assessment of your company’s internal infrastructure and management team, and the subsequent, necessary additions or adjustments. The strength of your infrastructure and management team, or lack thereof, can greatly affect the value of your business and the outcome of your ownership transition. Having a strong internal infrastructure and management team in place can facilitate a more successful and more profitable ownership transition. If your business lacks a strong internal infrastructure and management team, you can suffer a less than desirable outcome during the ownership transition process.
For a closely held business that lacks internal management beyond the business owner, the establishment of a strong management team is critical. The reality for many owners of closely held businesses is that they are not only owner, but chief buyer, chief financial officer, sales person and janitor. If the owner wears every hat, the business is weaker when that owner leaves, so it is vital to the value of the business to have a strong, independent management team in place before the owner exits.
The arithmetic of ownership transition planning includes the necessary steps to put your internal infrastructure and management team into place.
1. Gain Board Support
As the owner of a closely held business, the first step to building your strong internal infrastructure and team is to gain the support of your Board of Directors. Your Board plays an integral role in the future of your organization. Get the Board involved with the process to facilitate buy‐in and enthusiasm for building your management team and improving your infrastructure and internal processes.
2. Build Your Management Team
The second step is to secure your management team and improve your internal infrastructure. To build your management team, identify the most appropriate executives for your business and clearly define roles and responsibilities. Implement mentoring and formal training for your organization’s next generation of leaders to gain the bench‐strength you need to best transition your business into the future. Then look for ways to improve organizational processes and procedures. Hiring the right people and building a strong infrastructure will help your business achieve the best value when it’s time to transition ownership.
3. Achieve Your Ownership Transition Goals
The third step is taking your business to market, whether for an internal or external ownership transition. Your business will be much more attractive to prospective buyers with a strong internal management team in place and with a well‐developed internal infrastructure. And lenders will be much more likely to lend money to an established, productive management team. The valuation of your business for sale will reflect the internal investments you’ve made since value is most often based on ownership structure, management size, growth potential and visibility, among other marketplace factors.
At Prairie Capital Advisors, we work with business owners to determine where they fit within the Valuation Tier, then we help find the most appropriate buyer at the most favorable price and terms in the marketplace. When business owners make those critical investments in infrastructure and internal management, they reap the rewards. And that arithmetic adds up to more dollars and cents for them at ownership transition time.
Robert Gross is a Senior Managing Director at Prairie Capital Advisors, Inc. He can be contacted at 630.413.5585 or by email: firstname.lastname@example.org.
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