The 2iC Effect

You’ve heard it said: “Price isn’t everything.” It’s true, it isn’t—but, in our experience, it’s important to every business owner. In fact, it’s often at the top of the list. There are, of course, other factors, such as acquirer type, deal terms, post-sale changes, and timing. But when you watch a business owner read an offer, the price is the first place they go.

As we’ve written before, having a management team is important to achieving peak value. But what seems to often happen is that a management team is built, but no one could step up and run the company if the owner stepped down—there’s no second-in-command (2iC). John Warrillow, founder of The Sellability Score, had this to say after analyzing a survey that included 9,779 businesses:

Personally, I found that having a management team of senior leaders helped me to run my last company. When it comes to getting an offer, however, companies with a management team are only slightly more likely to get an unsolicited acquisition offer than those without one (17 percent vs. 16 percent). What's more, when we analyzed multiples offered, having a management team in place did not increase the value of offers received.

Keep in mind that most of the factors we measured had a significant impact on offer multiples, so the absence of any lift among companies with a management team is surprising and noteworthy. For example, having a monopoly on your product or service increases offer multiples by an average of 43 percent, while growing your top line revenue by 30 percent or more juices your likely offer multiple by 33 percent. So it came as a surprise to us how little having a management team matters when it comes to either getting an offer or the offer's value.

Neither John Warrillow nor I am saying that a management team is not important. To build a great company, you need a management team. However, having a second-in-command is the most important position your company can have when it comes time to sell, especially if you plan to leave shortly after. As a result, the second-in-command (2iC) effect is something that every business owner should be aware of prior to selling.

It Depends

For financial buyers, a management team is much more important. Often, these sophisticated investors will look for ways to build on the current management team. For private equity buyers or high-net worth individuals, if you don’t have a team in place, a business owner will be required to stay post-sale for 1-2 years and the price may be lower.

Strategic buyers integrate management teams differently. Overlap often occurs and the acquirer doesn’t need two people for one job. However, acquirers view the 2iC as someone who will stay post-sale and help them grow the business.

John Warrillow explains it well:

Unlike a functional executive (e.g., CFO, VP Marketing) where duplication almost always exists, a 2iC is a general manager with enough knowledge to help the acquirer realize the benefits of their purchase. What's more, most acquirers know that you, the owner, will be a flight risk once their check clears, and that they are more likely to be able to put an attractive compensation plan in place for a 2iC who did not benefit financially from the sale as much as the owner.

The 2iC Effect

The result of having a strong 2iC is a more attractive business for an acquirer. You always want to position your company in the best light, and having a strong 2iC is one of the best ways to accomplish that.

Reference: http://www.inc.com/john-warrillow/is-your-management-team-worthless.html?utm_content=7102323