Exit Strategy Planning – Maximizing Value Through Your Employees

For business owners considering the sale of their business, the key phrase to focus on is TRANSFERABILITY.  This concept drives value and marketability of the business.  The higher the transferability factor, the greater likelihood the business can be sold, and sold at the price the owner is seeking.

Critical Transferability items include:

• Revenue/Profits
• Employees
• Customers
• Management Team
• Processes and Procedures
• Suppliers

After adjusted earnings, the most important value driver in a business is the employee, including the management team.   Employees create the business’ value proposition, they are the interface to the customer, they provide the products/services that drive revenue and profits.  Without a strong employee group the buyer sees risk.  The higher the risk, the lower the price and the fewer potential buyers.

And your response to the above – “Great, tell me something I don’t already know.”  Finding quality employees is the most difficult area for an owner today, especially, if the employees need to have technical skills.  Every business owner we talk to in the manufacturing, HVAC, plumbing and electrical fields are frustrated by the lack of available talent.

Highlighting this topic has the risk of sounding trite and/or condescending.  I don’t mean to be anything of the sort.  Believe me, I understand this is probably the hardest problem for a business owner to solve right now.  However, there are a few things I’ve picked up in working with businesses over the last 10 years.  So, here goes:

1)  Is it worth the time, energy and expense to crack the code on this?

The average multiple of adjusted earnings for small- to-medium sized businesses nationally is 2.4X.  So what is the cost or gain of building the strongest employee group possible?

In the example below, using the same adjusted earnings of $200,000, you can see the difference in value between a company laser focused on improving the employee base and one that doesn’t.  Note the difference in the Earnings Track Record.  A business that has ongoing challenges with being understaffed or under skilled will always have lumpy earnings.

Back to the main question, is it worth it to crack the code on this?  Absolutely.

2)  Delegating

Hearing the word “delegate” can have the same effect as nails on a chalk board to many business owners.  Why?  Tried it, didn’t work!   Add to this the fact that most owners don’t feel comfortable with pushing down authority into the organization.

Delegating is not a God-given talent.  In fact, for entrepreneurs, it often doesn’t fit their personality.  The good news is that delegation is a skill that can be learned like QuickBooks or any other tool in your business.

The importance of becoming a good delegator can’t be over stated, it drives everything else.  Delegating is the tool by which an owner can develop and lead a management team.  It is how an owner extricates themselves from working in the business to on the business.  And finally, it is what will provide the time and support within your organization to better hire and train employees.

3)  Developing a management/supervisory team

See above.  You must be able to delegate to be effective in this area.  In addition to delegating you need to share – another difficult trait for some owners.  You need to share your vision, as well as, your challenges.  And you must create an atmosphere to allow those team members to help you solve the challenges.  Finding, hiring and training employees is one of the areas your team can provide assistance.

4)  Be a Teacher

The adage about teaching someone to fish versus giving them a fish is a key to employee development and retention.  When a machine shop owner is always jumping in to do the machine set-up or doing the hard parts rather than taking the time to train an employee, they have solved a short-term issue but created a long-term problem.         Both the owner and key supervisors need to be teachers at all times.  In this situation, not only don’t critical production issues not get resolved, but the employee feels diminished and doesn’t grow, leading to turnover.

5)  You Need to Be the Solution

There will not be a magic wand waved that solves this skilled employment issue.  An owner needs to “own” the solution.  A plan needs to be put in place and followed.  Again, this will be a function of time, energy and creativity.  Once again using the machine shop as an example, an owner needs to engage with its trade association, local trade schools, high schools and community colleges.  There are recruiting firms that focus on skilled labor industries.  Yes, it may be expense if hire through an agency, but the real cost is in missing deadlines, losing customers and having a business with a reduced value.  In the absence of traditional apprentice programs, an owner may need to create entry positions and internships to find people who are interested in the industry.

Of course this article only skims the surface.  The hope is to create an understanding of the Return on Investment proposition to justify making the effort and change needed to win the Value war.  The market for selling businesses is as competitive as your market environment, so face it with the same intensity.

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