Quality Leadership Significantly Improves Business Value

Jun 25, 2020

IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses.  The following blog has been provided by Michael Beck of Eliciting Excellence (www.elicitingexcellence.com):

Quality Leadership Significantly Improves Business Value

Everyone’s heard about how Baby Boomer business owners will be retiring and about the wave of business successions/exits that will occur.  But there’s a problem that almost no one is discussing.  Our research clearly shows that there aren’t enough buyers for all those businesses.  Here’s why and what you can do about it.

Our research suggests that the pace of exits and successions will begin to increase this year.  This conclusion is due to several factors.  Life expectancy in the U.S. has risen above 80 years old, up from 72 several decades ago.  Accordingly, the expectation of retirement age has also risen.  When life expectancy was 72 years old, retirement age was considered to be 65, but because people are living longer, owners are now waiting until their 70’s to retire.  The leading edge of the Baby Boom generation turns 74 this year.

The SBA reports that there are roughly 6,000,000 small employers in the U.S.  Of those 6 million businesses, approximately 3,600,000 are owned by people over 50 years old (Baby Boomers) and about 2,400,000 are owned by people 30-50 years old (GenX).  Based on US Census population statistics, this means about 4.5% of Boomers own a business and about 3.0% of GenX’ers own a business.

Assuming the number of GenX’ers who own (or want to own) a business rises to the same 4.5% as the Boomers, the rise from 3.0% to 4.5% only represents 1/3 of the Boomer businesses looking for a buyer.  And that means that 2/3 of all Boomer businesses won’t find an individual buyer!

While it’s true that some businesses will be a good candidate for a strategic acquisition, most won’t.  And while it’s also true that there is A LOT of private equity money looking for a home, most businesses won’t be attractive to private equity investments.  Private equity firms are generally looking for opportunities where they can drive dramatic growth over a five-year period and then sell at a significant profit.  Most businesses don’t realistically have that potential.  Historically, businesses with a seven-figure sales price will only close about 25% of the time.

If we take the remaining 2/3 of Boomer businesses that can’t find an individual buyer and assume 25% of them will be attractive targets for strategic acquisition or private equity, it still leaves a full 50% of all Boomer businesses who simply will not find a buyer. 

Therefore, only the most attractive businesses will find a buyer and command their full value.

Although there are many important factors that make one business more attractive than another, a key consideration is the strength of the leadership team.  The strength of a leadership team impacts both the value of a business and likelihood that the deal will close.  Our survey shows that the strength of the leadership team will influence a company’s value by as much as 20%.  Additionally, if a business’ leadership team is weak, the likelihood that a sale will go through diminishes dramatically.

Therefore, if you want to maximize the likelihood of selling your business and selling it at full price, the strength of the leadership team must be addressed in advance of going to market.  The leadership competencies of the team must first be objectively assessed so their strengths and weaknesses can be identified.

These competencies fall into four general areas:

CHARACTER TRAITS: A leader’s character plays a large role in leadership effectiveness. Character is established by clarifying and honing the values and behaviors that matter, and then acting in a manner consistent with those values and behaviors.

INTERPERSONAL COMPETENCIES: The manner in which a leader interacts with people also plays a large part in a leader’s ability to make a difference. These competencies affect a leader’s ability to influence people and they determine the level of response elicited.

STRATEGY AND BUY-IN: An effective leader must be a good strategist and have the ability to gain buy-in for his or her ideas, strategies, and plans. By learning to think strategically and becoming influential within the organization, a leader becomes more effective.

JUDGMENT AND DECISION MAKING: An effective leader must have sound judgment and make good decisions. These are gained through experience, learning from mistakes, and getting outside perspective.

Once the assessments are done, the results will either confirm the strength of the leadership team or highlight some weaknesses.  If you identify an area that needs addressing, a program of leadership development should be undertaken to ensure the team’s effectiveness.  Although development can usually be accomplished in about six months, this initiative should ideally be started 2-5 years in advance of a transition.  Start now, establish leadership effectiveness, and boost buyer confidence.

If you’d like help assessing and or developing your leadership team, please contact us.  We also specialize in recruiting and developing successors.

Michael Beck is an executive coach, business strategist, and author.  If you have questions about the content of this article or would like to obtain information related to the services offered by Eliciting Excellence, Mr. Beck would welcome communication at (503) 928-7645 or  mbeck@elicitingexcellence.com. His company offers leadership assessments and executive coaching, all designed to help successors succeed and owners get paid. Learn more at www.ElicitingExcellence.com.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.