By Jack Bailey, Managing Director and Co-Founder of Bailey Southwell & Co.
While some business owners may initially think they need to be exclusively focused on financial metrics (revenue, gross margin, adjusted EBITDA, etc.), the value of a business transcends just numbers.
In Part One of this piece last week, we discussed the first of three non-financial factors that also drive business valuation and marketability. This week’s installment focuses on the importance of culture and talent and how these factors can increase valuation come sale time.
While culture can be often be overlooked when thinking about a potential transaction, it actually can be one of the most important factors in ensuring that a transaction is successful. According to a McKinsey poll, nearly 95% of executives believe cultural fit is critical to the success of an integration while 25% say lack of alignment is the primary reason integrations fail.
From a culture perspective, middle-market companies can at times be operated like “lifestyle” businesses, which can lead to a fun working environment. And while a fun environment is great, a culture steeped in a strong work ethic is extremely important to buyers. Lifestyle businesses with extensive employee perks may command lower valuations – given that buyers cannot continue some of the perks, there is a risk that employees will leave post-transaction.
Culture is hard to foster, but our recommendation is to focus on creating an environment that becomes an attractive destination for the right talent with a focus on growth and innovation, where current and emerging leaders thrive. All employees benefit, and you create a stronger platform that will be attractive to potential buyers.
“Business can be viewed as a living, breathing entity. It undergoes change, it grows, and it also recedes. A business can break, but it can also heal. The people are the individual cells that work together to ensure that the entity is healthy, productive, and thriving,” says David Mizne, Marketing Communications Manager at 15Five, a maker of continuous performance management software. We couldn’t agree more.
Building a talented team to guide growth is imperative. For many business owners, being involved in everything from operations to sales to HR is normal. However, for a business to successfully scale, it is important for the business owner to give up the reins to some key tasks and surround themselves with a high-performing senior team.
Best practices for building out a senior team:
Have a Plan: Put together a plan with a focus on the senior positions that need to be filled today and in the immediate future. (Remember, hiring the right candidate can often take up to six months to hire and another six months to fully ramp.) Having a general idea of talent needs well in advance will provide the ability to be nimble should the opportunity arise to make a high-quality hire.
Hiring Talent: With a plan in place for building a senior team, successfully placing these senior positions will be easier than it would be with a more reactionary approach. One of the best resources for identifying quality candidates can be through close industry contacts. Let contacts know what roles are to be filled — these contacts likely know or interact with senior talent that could be great fits for the business. Networking at industry conferences can be a great way to meet potential candidates as well. Also, don’t lose sight of the fact that promoting internal talent can be a great option. Should the need for talent become pressing quickly, turning to well-respected recruiters in the space can be an effective strategy.
Retaining Talent: Taking the right steps to retain talent is crucial. It ensures that all the hard work put in to hire the right people was not for naught. Additionally, it’s very important when selling is a possibility. According to research conducted by SourceMedia’s research department on human capital management strategies, 79 percent of survey respondents said retention of key employees is a top initiative when a transaction is completed. In addition to the obvious need to pay employees a competitive compensation package, there are other steps to successfully retain and motivate talent. For example, provide employees with clear avenues for growth – this can include opportunities for increasing responsibility and encouraging professional development. Additionally, have a program in place to regularly recognize top performers. Furthermore, mentorship programs are highly desired and help contribute to a close-knit management team.
So, why is all of this focus on talent important to business valuation?
Potential acquirers want to know that the senior team has the proper skills to lead the business after a transaction. If the owner has all the knowledge and is not staying on after the transaction is complete, the business is worth a lot less. The senior team members are the key people who will keep the business firing on all cylinders during and following a transaction, ultimately leading to a positive integration and continued success.
The bottom line: financial metrics will always be important, but the valuation of workers’ comp services firms is driven by more than just the numbers — brand equity, culture, and talent are key drivers of value.
About Jack Bailey
Jack Bailey is a Managing Director and Co-Founder of Bailey Southwell & Co., a Nashville headquartered investment banking firm focused on the payer services, healthcare, and tech-enabled services industries.
With over 20 years of middle-market deal experience, Jack has worked on over 75 sell-side, buy-side, and capital raising transactions for both public and private companies. He has a focus on the payer services industry, with the majority of his recent experience working with founder-led companies in the workers’ comp industry.
Jack’s depth of experience and extensive network has enabled him to provide ideas, solutions, and processes that result in exemplary outcomes for Bailey Southwell clients.
Jack received his J.D. from Vanderbilt Law School and served as Corporate and Securities Counsel in a national law firm and in a Fortune 500 company. He holds his Series 24, 79, 62, and 63 securities registrations and is registered with StillPoint Capital, member of FINRA/SIPC.
About Bailey Southwell & Co.
Headquartered in Nashville, Tennessee, Bailey Southwell & Co. is a partner-owned investment bank focused on middle-market healthcare and tech-enabled services businesses. We provide customized M&A advisory solutions for middle-market change of control transactions and growth capital raises from $10-$50mm. Since our founding in 2005, our senior bankers have closed over 200 transactions representing more than $15B in value. We also manage BSC Capital Partners, a co-investment fund supporting high-growth healthcare and technology companies with flexible capital and strategic insights to accelerate growth. View our website for further information: www.baileysouthwell.com.