The hidden value in your management team

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There is no doubt that leadership and management in any organization is critical to building business value, but did you know that it’s also a focus of most consultancy buyers’ due diligence when considering a purchase?

On a recent webinar, Equiteq Chairman Paul Collins answered questions on why management quality is important to consultancy buyers and investors.

  1. How do you manage the potential conflict of building the profiles and skills of managers to attract a buyer when these managers may want to leave after a sale?

The focus of buyers during due diligence is on the top two levels of leadership in the business – the board leadership and the business unit leadership. Managers at this level are often required to stay with the new firm for a period after sale.

If your managers are intrinsically involved in every significant operational activity, then a buyer would be reluctant to see them exit. But if a manager’s responsibility is easily transferable, then there is a greater chance of a buyer allowing a manager to move on.

If you’re a business owner who wants to exit immediately after selling, rather than staying in the business during an earn-out period, you need to make yourself superfluous to the day-to-day running of the business before entering into the sale process.

Not sure about what an earn-out is? Here’s our blog on the 10 critical success factors for earn-outs: part 1.

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Does your leadership team work ‘on’ or ‘in’ the business?

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Management quality can be a big problem for consulting firms. However as one of our 8 levers of growth, it is worth exploring why it’s so important to a firm’s equity growth.

Financial investors say they invest in management teams first, firms second. An investor wants to see a balanced, experienced leadership team with a track record of delivering results; working in an environment where they spend more time working ‘on’ the business rather than in it. If this is happening then the firm is likely to be innovative, focused, and tightly managed with good KPI measurement and financial control.

Why is management quality so difficult for consulting firms to get right?

Very often consulting firms are founded by people that have great technical expertise but rarely the experience of having built and grown a company before. Running a consulting firm requires different skills to delivering consultancy. Business management consulting firms can be the exception to this general rule, but it is often the reason why management is a big challenge for firms.

When you are a small firm you can get away with a lack of business management experience in the team but as you grow and approach your first glass ceiling – around the $2.5m mark – having the right skillsets in place is essential if you want to build a business with real equity value.

What management skillsets does a consulting firm need?

Assessing what skillsets you have on your management team is a good place to start answering this question. Although it’s not just a case of what your management team can do but what they should be doing to optimally run and grow your firm.

For example, an experienced finance director would be the first valuable addition to a consulting firm’s management team. It would free up a managing director from overseeing the financials of the business to focus on building revenue. Finance expertise is particularly important for a firm if it is approaching a sale process.

There comes a time – before entering the sales process – that having a chief operating officer becomes critical. Typically overseeing the firm’s infrastructure and providing metrics to drive the business forward, an operations director or COO can be invaluable in helping a firm anticipate issues and drive efficiency.
Finally, consulting firms can benefit from having non-executive directors on their board to act as advisors. We’ve covered what sort of advisors can be helpful to firms in Who should you trust?

Do you have a unified board with a clear vision and strategy?

No consultancy should get to a reasonable size and not have a board unified in the vision for the firm and what the exit strategy looks like. That’s not to say the same exit strategy will apply to each founder or partner. Founders can often have different motivations for setting up and running their own business, so being clear on who will want what and when, is important.

It is also down to the management team to define and nurture the culture of the business. Again, this becomes more important once the company starts to scale and employs more than 15-20 people. Strong leadership is key to attracting, retaining and motivating talent.

In conclusion, assess the skills you have at the top of the business and invest in good finance and operations management. Be crystal clear on your vision and strategy for your firm and ensure you’re all unified behind this as a team. Communicate results and empower all to improve the performance of the business. Finally, as a founder or senior team member think about how you balance working ‘on’ and ‘in’ the business.