Be Wary of Loyal Management Teams
I was helping a client buy a technology business that had a huge marketing engine driving new sales. It was not a software-as-a-service company per se, but more of a tech-enabled services company that required some human interaction and customer service.
The business was founded by a serial entrepreneur who had founded several businesses in the digital marketing space. He had been in the current business for five or six years and wanted to sell this business and move on to something new. We were told that the management team would be staying with the business.
Everything looked fine, and we did the Quality of Earnings (QoE). When we got to the end, we did some additional diligence—that I highly recommend, but is often declined by buyers. We took a deeper look at the management team to understand whether we believed they would stay with the business even though the seller was leaving. We found that the seller had worked with these guys for 15 to 20 years. All of them had the seller’s former company on their LinkedIn profiles in addition to the current company.
The seller was selling the company on its way down. It was struggling for a couple of reasons. The management team who were said to be dedicated in a full-time capacity to the business were not indeed full-time. They were all also working at the seller’s other company. This management team had followed this owner and entrepreneur through two or three successful startups. As a seasoned deal professional, I understood that it was very likely that the management team would move on to what the seller was going to do next.
If history is any indication of the future, it was likely that the management team would start splitting their time with the next business that the entrepreneur started. The management team was either likely to get ownership in the next company or they would decide that they wanted to work with the seller to grow the next company. They’d rather work with the serial entrepreneur who owns the company than work with a new owner that they didn’t know, hadn't paid them for the past 15 plus years, and they had no working relationship with.
Learn about the important questions you need to ask during diligence in my white paper: 13 Financial Questions to Ask Before Buying a Business