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Enhancing Value: Create Quality Second Tier Management

Posted by Jeff Muir on 7 April 2014 | Comments

At inception an owner puts together a team of people to help the business move forward. Hiring is based on the company’s needs but also on what the business can afford at the time. Over time the business has success, growing from $1m in revenue to $5m and then to $10m. The company has different needs and different resources. The owner’s original team may no longer be optimal. A larger and more complex enterprise needs a more effective management team. It is no longer acceptable for the owner to be involved in every decision and have managers execute on the owner’s wishes.

We were asked to visit a business a few years ago that had a long successful history of manufacturing and delivering a custom made consumer product. Ownership had made an apparently successful generational transfer several years before. The new owner was still relatively young but was interested in selling the company. It became apparent after some discussion that he had inherited several key managers that were ineffective and unable to help the business evolve in the direction it needed to continue its success. He was uncomfortable firing anyone that had been with the business so long and was someone his father had hired. The owner was between a rock and hard place.

As a company grows, it can outgrow its current management’s capabilities. In a worst-case scenario, management (or lack of management depth) becomes an impediment to continued growth and actually begins to cost the owner more in lost profits than the salary increase of hiring more qualified talent. Ownership should work with the company’s outside advisors or bring in an HR consultant to periodically review whether the current management structure is capable of reaching the company’s goals.

As owners contemplate a transition, they often assume the new owner will bring in new managers. They often convince themselves to do nothing rather than confront a management shortcoming. Buyers will often bring in new managers. They will just as often reduce the sales price based on the perception that current management is inadequate and there is a cost (and risk) to creating a new team.

Buyers will pay a premium for a solid management team that does not need wholesale changes. A good management “engine” will enable the new owner to execute his/her plan for growth to increase their opportunity for a solid return on their investment.