Did you know that 33% of employees in an acquired companies leave within the first year after a sale? That’s almost three times the normal attrition rate of traditional hires. https://mitsloan.mit.edu/ideas-made-to-matter/your-acquired-hires-are-leaving-heres-why
These aren’t just statistics to digest, they’re warnings to take heed of. Without prepping your management team for a smooth exit following a sale of your business, the company you spent your blood, sweat and tears building will be at a higher risk of failure.
In this guide, we’ll walk you through an example management prep timeline that will give your team the best chance of success post-exit. Whether you're planning to sell your business in the next year or five, starting now is the difference between a smooth exit and mountains of problems.
Why Management Readiness Is a Key Predictor of Exit Success
When buyers look at your business, they aren’t just looking to purchase your revenue, they’re buying your team’s ability to sustain and grow that revenue over the following 3-5 years.
To give buyers more confidence in your team’s ability, you need to provide a management transition plan. That includes documenting key roles, responsibilities and standard operating procedures as well as providing a plan to keep key talent on through transition, a transition plan for you to help the new owners with the management team post-sale and a plan for continuity with real estate and any other assets your company owns.
Once these steps are complete, buyers will have much more confidence in the businesses ability to remain profitable and grow in their first years of ownership.
The Hidden Cost of Owner-Dependent Operations
One of the biggest red-flags for buyers when searching for businesses to invest in is an owner-dependent operation. Reports consistently show higher EBITDA multiples for companies with structured management teams compared to those that are mostly owner reliant. Further, 62% of mid-market deals see price cuts when the owner is the sole knowledge holder.
To avoid this “key person risk,” you need to build out a management team if you don’t have one and prepare them with as much internal knowledge as possible through documentation on key roles, responsibilities and standard operating procedures. Without a team who can prove they understand these parts of the business, you’re likely leaving a large amount in valuation on the table.
Preparing for How Buyers Evaluate Your Team
Buyers use a standardized management scorecard during due diligence, which you can prepare your management team for. Here’s what you need to look out for:
- Org chart clarity – Reviewing business structure is critical for buyers and shows that your team is laid out in the most efficient way possible. This is your chance to organize your company in the most impressive way for new owners.
- Retention incentives – Since more than 33% of talent leaves within the first year after a sale, you need to come up with a plan to keep key talent on board. One strategy is significant bonuses paid 12 months after close.
- Non-compete strength – Retaining key management pieces is critical for sustained success, so consider writing 2-3 year non-competes and non-solicits for revenue-critical roles.
- Cultural fit scoring – Prepare your team with a unified vision of the business post-sale. How can they fit into that vision and communicate that clearly with potential buyers?
Your Management Prep Timeline
If you are looking for a timeline on how to sell your business, the below outline will give you a quick look into the key moments and checkpoints within a 12-24 management prep timeline (remember, this is just an example, not a hard and fast rule).
- Assessment (First 2-4 months) – Take time to assess your company’s structure, do a leadership audit to make sure all key roles are filled and create a succession gap map, which shows the weak points of your business structure and how the new owners can prepare to build those areas up in the transition period.
- Role Clarity (Next 2-4 months) – Look at all key jobs and update their descriptions and responsibilities to make sure all areas of your business are covered. Create KPI dashboards that show what metrics are most important for your business and track them so the new ownership can know where to look for signs of business health.
- Incentive Lock-In (Next 2-4 months) – Create stay bonuses for key members of the team, create phantom equity (which gives employees a cash bonus tied to the company’s stock performance without giving any ownership of the company away) or offer any other kind of “golden handcuff” agreement that incentivizes key members to stay.
- Knowledge Transfer (Next 3-6 months) Record standard operating procedures (SOP) for key business tasks, prepare key vendors for ownership transfer and shadow management positions to make sure all the work done before has resulted in an efficient structure and process moving forward.
- Buyer Rehearsal (Last 3-6 months) Get ready for buyers by doing mock Q&As, compiling as much data as possible and simulating due-diligence.
7 Must-Have Roles for a Sellable Mid-Market Business
Filling or creating these seven key roles are critical to avoid the key person risk that tanks so many mid-market business sales.
- Chief Operating Officer (or General Manager) – This role runs daily operations without owner input and delivers key, weekly KPI dashboards that the company’s decision making lives by.
- Chief Financial Officer (or Controller) – Delivers clean, GAAP-compliant financials alongside 12 months of financial forecasting. Without someone with intimate knowledge of your company’s financial situation, messy books could result, which is a major factor in many deals falling apart.
- Sales Leader (if applicable) – Someone in your company needs full knowledge of your CRM pipeline, contract templates and renewal schedules, ensuring that ownership transfer doesn’t lead to lost business.
- HR/People Lead – This role will take the lead in designing retention packages and managing the succession plan, with a focus on decreasing the normal 33% attrition rate in year 1 after a sale.
- Real Estate Manager (if applicable) – If your business has real estate assets, this role will oversee the leases, appraisals and renewal calendars.
- IT/Digital Lead – In today’s digital-first age, you need someone who can ensure cybersecurity and manage your tech stack.
- Transition Captain – This is an optional role, but really comes in handy during the transition period, providing the buyer with a single point of contact post-close should any questions or concerns arise.
Conclusion
Ready to Make Your Team Buyer-Proof? Start Here
Consider Prospere Companies for your mid-market business sale. With years of experience in mid-market brokerage, commercial real estate sales and exit planning, we are the perfect team to guide you through this exciting process. Ready for next steps? Contact us below.
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