Let’s say that after a few tough years, you finally have your business headed the way you want. You cut costs dramatically when the economy slowed and made some difficult decisions.
Now, your sales have started to inch up, expenses have mostly stayed put, and you’re proud of what you’ve accomplished. You still see growth in front of your company, but you also know it might be time to sell, since you can tell a buyer about a solid business that made it through a tough time and is poised to grow.
Investors are interested, but they also provide feedback--feedback you may have thought about, but hadn’t heard so directly.
Investors tell sellers a lot of things in the sales process--but some come up repeatedly, particularly in regard to management:
The management team is incomplete and needs to be expanded. Investors have the advantage of looking at your team with no social contracts, no biases about personalities, and a model of how management teams need to work. In nearly all cases, they are asking “how can I make this team better to strengthen my investment?” Some may have a strategy of changing out teams. All will be thinking about how they can make a team better.
The CEO needs to change roles. This is a tough one. The person who starts a business and grows it to $10 million in sales may not be the person who can manage the complexity of getting the business to $100 million. (See The Secret Dealbreaker.) Investors may view you more as a head of sales, or perhaps the chair of the company’s new board. They don’t see many entrepreneurs with the skills to start a company, grow it, and then manage it to scale.
Your controller isn’t strong enough. The investor views the controller or financial role as a key part of the team. Small companies use bookkeepers, controllers, accountants and often spreadsheets at the beginning. Investors will press the person in this role right away to see if they can do more and be razor sharp on the financial needs of the business, including how it can be run more efficiently. Don’t be surprised when the investor looks to bring some more firepower to this position.
Your information and reporting systems need to change. Along with the need to upgrade your financial personnel will come a request to upgrade your financial systems. Investors want a lot of financial data and evidence of a consistent reporting system that provides that data. They are going to use this to measure your performance as well as the company’s.
Your family members need to move off the payroll. Investors may allow this briefly, but in the long run, they will almost always assume a family member is on the payroll because they are family, not because they are the best candidate for a position. You value family members in a business because you trust them. Investors don’t get that benefit.
You can take different approaches by anticipating this feedback and preparing in advance:
You can be proactive. Start by making some of these changes yourself. Build and strengthen your team, so these issues turn from something an investor will want to challenge into something that shows your strength.
Take the opposite tack. Honestly note to investors where some of these deficiencies might be, so they can see them as opportunities for improvement.
Be prepared to hear these issues--it’s some of the toughest feedback you will ever receive, but a necessary part of any sales process when you get to that decision.
Based in New York, ED POWERS is a managing director and head of the Capital Access Funds team at Bank of America Merrill Lynch. Capital Access Funds is an experienced, returns-driven private equity fund-of-funds.