Should Management Remain After Closing The Deal?

More and more corporations and private equity firms are putting a priority on knowing up front the intent of the management team or entrepreneur before seriously evaluating a business. I thought this was important to pass on to entrepreneurs and business owners, so this blog has some background and advice for entrepreneurs who are looking to sell either all or part of their company.

Private equity firms and strategic sponsors who we work with are increasingly asking us to discern up front the intent of a business’ current management. Particularly in times where economic factors may be influencing management thinking, buyers want to make sure they understand this issue.

Generally speaking, company management’s intent after closing a deal can be sorted into three different categories:

1. Management plans to stay on with the company and is looking for a partner who can help them improve/grow the business
2. Management plans to transition the business to new management over a 12-24 month period, after which they intend to depart.
3. Management does not intend to stay on and will depart after the closing of the transaction.

As a business owner evaluating a potential transaction, you want to make sure that you choose a financial partner that is prepared and on board with whatever choice you intend to make among the above three.

What’s worth noting about middle market M&A and private equity transactions is how varied the acquisition strategies are among different buyers.

Some buyers pursue strategies in which they intend to insert their own management team; an excellent New York-based private equity firm whom we know very well inserts one of their “Operating Partners” as CEO & Chairman of every company they acquire. Strategic investors often employ this strategy because the acquisition will be folded into a division of the corporate parent and there’s an existing manager who already runs that division.

Other buyers don’t want to invest or acquire any private company where the management team in place does NOT intend to remain with the firm with a significant ownership stake rolled into the newly acquired entity. Their preference is to partner with existing management and help them run the company even more effectively.

In some cases, they may prefer to leave current management alone and they simply wish to own the business because they think it’s so promising (Warren Buffett is famous for this approach at Berkshire Hathaway and has employed it with Geico and many of the other businesses that Berkshire now owns.)

What does all of this mean for the entrepreneur / management team that’s planning to sell? Make sure that you’ve made up your mind before starting the sales process as it greatly influences which buyers you’ll want to approach.

Furthermore, make sure that you, or the advisor (banker/business broker) who is representing you in the transaction, clearly states your intent in the preliminary materials that are prepared to summarize your company. If you don’t include this, you will waste time pursuing firms that aren’t strategically aligned with your intentions, a complete waste of everyone’s time.