RSS feedsPrivate equity fund managers often say that the hardest thing they have to do is assess the calibre of the management team in a new investment. They might find this easier if they regarded the business’s requirements in the light of its scale and its stage of development. This is especially true of the smaller end of the investment spectrum.
Businesses need different styles and capabilities in their senior managers at different times in their lifecycle. With a start-up, the main objective is to survive through to the next month end. This generally requires one dominating and driving individual who is obsessed with making the business work.
For a while there may be few other executive-type roles available as the founders do everything themselves. However, if an entrepreneur lacks the skills in, say, accounting or payroll, these will be outsourced to professional support companies.
Businesses at this early stage are rarely attractive to private equity investors. Accountants, on the other hand, can provide valuable support in cash management, accounting, payroll and company secretarial services. Good foundations and disciplines at this stage will support later efforts to grow the business.
As the business expands, the entrepreneurs will release their grip on operational functions and will recruit a small team of trusted senior managers to support them.
The incumbents in these roles must be dedicated, independent-minded and more competent individuals than the founder. It is these qualities that will allow the business to become more ‘professional’ and grow independent of the founder.
When the business is ready for a more broadly based team to run it, it will also require the development of more formal business systems to manage the day-to-day operational issues. Entrepreneurs frequently reject these as ‘bureaucracy’, and it is true that if not well managed and controlled, they can result in a distancing of executives from their customers, suppliers and employees.
The challenge of resolving the conflict between the business’s need for more formal and routinised management processes, and the resistance to precisely those disciplines from the freewheeling founder entrepreneur, is great. It is a good measure of the maturity of the founder and of the capability and professionalism of the management team around them as to how well this challenge is met.
A capable entrepreneur supported by a loyal team can frequently grow a business to around £15m in sales. As the business grows beyond that, I believe that it is running on borrowed time. The business may be generally run as it always has been regardless of whether this is the best or most efficient way to operate. Typically, the executives operate in ‘silos’ connected only by the founder’s activities. Sooner or later something will break under the strain.
Some entrepreneurs will attempt to stand back during this growth phase, and devolve day-to-day operational responsibility to a CEO, while they assume a chairman-type role. Frequently, this ends in failure. The new CEO either tries to emulate the founder and fails, or their efforts to professionalise the management are resisted.
It is at this time that the trusted adviser must explain the importance of what needs to be done to prepare the business for its next stage of growth. By putting a competent team and systems in place, with a remit for growing the business, it will make the enterprise a far more attractive proposition for a private equity investor and so offer founders their opportunity to exit.
George Moore is a recovery specialist. He can be contacted at: gm@resolutioninc.biz
ADVICE ON GROWTH
Start-up business, up to £3m
- Make sure there is a good grip on cashl Keep control of documentation
- Don’t allow the client to get caught by surprise on secretarial and tax matters
Mid-stage growth, £3m–£10m
- Invest in expandable systemsl Hire the best quality staff, not the cheapest
- Try to get the founder to think about working on the business, not in it
In a larger business, £10m+
- Suggest replacing the senior staff if they have not grown into management roles
- Consider replacing or updating the systems to allow another £10m sales
- Encourage regular input from a non-executive peer group
