The Value of your Management Team

When you look at your company's balance sheet, you see assets and liabilities.  Today, let's consider an asset not visible on your financial statements, but critical to your success.  Some businesses have a lot of equipment and machinery that they carry as assets.  Others have patents and other intellectual property.  But one of the most valuable assets to a prospective buyer is that one that doesn't show up as a line on the balance sheet--your management team.

 This is something we discuss at great length in an exit planning context.   Very often, a buyer will be looking for a company which can run smoothly when the former owner is no longer in the picture.  Or if a sale to third parties isn't your objective, your management team may be your buyer, or support your heir in a family transition.  In any case, they are a key to making your dreams a reality.

As the business develops -typically long before the owner considers his or her exit-- one must assemble loyal, talented people, and as the company grows, he must keep them on board.  They will play an important role in building the company.  To feed and nurture them, we use a process called the three R's of key employees-Recruit, Reward and Retain. 

Recruit   For the owner to find the right people to fill key management roles is a tough task.  Sometimes insiders grow into key roles, other times he must go outside the company to find the right talent.   Whether to promote from within or go outside can be agonizing for an entrepreneur in the early stages.   By defining the skills and traits of the person needed to fill the role, it will be easier to begin a search of both insiders and outsiders to find the appropriate talent.   Promoting from within is cheaper, but business owners often learn they just don't get the skills they need to fuel rapid growth.  To attract top talent from outside, not only must cash compensation be competitive, but fringe benefits must be similar to or better than what other companies offer.

Reward   To keep top performers motivated, it is critical to put in place an incentive plan which rewards this group as the company grows.  These plans take various forms but should include cash and deferred components.   The key to a well-designed plan is that it be in writing and it provide a meaningful amount of reward-typically 25% or more of base compensation.  The award triggers should be based on results that grow the value of the company.   By following this approach, key employee behavior becomes aligned with the owner's objectives.

Retain   As your management teams grows in value to you, they may start looking good to your competitors, or they may get the entrepreneurial urge themselves.   A well designed incentive plan has "golden handcuff" features that will force a key employee to walk away from a large amount of money if he or she leaves before a date defined in the plan document.   Good plans encourage all parties to profit together by staying together.

For a business owner who is looking to transition out of his or her company within the next two to five years, training, supporting and motivating a management team is a critical success factor.   Their compensation should be seen as a strategic investment to help you, the owner, achieve your exit goals.