If the owner of a company manages to make himself – and possibly other people – redundant, this gives a significant boost to the value of that company. If the owner does not manage to make himself redundant, this will have a negative effect on the value. In addition, in this second scenario, a sale also has consequences for the structure of the deal.
Many entrepreneurs are genuine control freaks. They want to make a big mark on everything in their company. They are also quite proud to say that they themselves have a serious say in sales, operations, R&D, etc.
Flight to the Bahamas
No matter how much an entrepreneur derives pride from this, the desire for control becomes a problem when a sale is made. A potential buyer will rightly ask himself whether he can still rely on the seller once he or she has received his or her money. Won't the seller tend to leave on the first flight to the Bahamas?
If the selling entrepreneur is still important in the company and after a sales deal he immediately says goodbye, then that is of course a problem. Essential knowledge and experience then disappear. But there's more than that. Certainly in companies that are owned by a founder, the loyalty of (many) customers and employees lies with the entrepreneur.
If that entrepreneur leaves, there is a risk that several important customers and employees will leave. In a worst-case scenario – and that happens often enough – an exodus of key customers and staff lead to the implosion of the company.
Reduce dependency
This brings us to the deal structure. In any case, the presence of an all-controlling entrepreneur has a negative effect on the valuation of a company. The seller usually sells because he wants to do something else. This means that the buyer must reduce his dependence on the seller. This costs the buyer time and energy and entails risks. For example, do some customers only stay because of loyalty to the entrepreneur?
All this can never be completely overcome by adjustments to the structure of the purchase agreement - but it can be partly. There are two classic ones tools which can provide comfort to the buyer: a earn outclause and a vendor loan.
Both are intended to commit the seller to the company for a longer period of time, usually two or three years. With an earn out, part of the sales price is only paid later (for example after two years) and the sum is also determined by the future results of the company. In a vendor loan, the seller lends the buyer money to buy the business. In both cases, the seller remains financially bound. It is also important for the seller that he only agrees to such a structure if he also has influence on the policy.
Another option to bind the entrepreneur and offer the buyer more comfort is for the seller to buy back into the so-called NewCo – a newly formed company that is specifically set up for the takeover. In most cases, the seller then becomes a minority shareholder. At No Monkey Business, we often see this desire among venture capital and private equity buyers.
Make yourself replaceable
Much better than looking for a solution in the deal structure is that as a selling entrepreneur you make yourself replaceable before you offer the company for sale. In 2022 No Monkey Business guided founder Emile Peels van ABC E Business towards one dream exit. Before going public, ABC E Business recruited two people to form the new management team. One of them became the face to the outside, and the other assumed operational control.
When a buyer (an investment company) subsequently came forward, Peels was able to leave the company without difficulty. The two new directors were able to step in as shareholders alongside the investment company: a win-win situation.
The last important point with regard to this theme is that a potential buyer sometimes sees the replaceability of other employees as a risk. For example, in the current tight labor market, software developers are sometimes seen as an Achilles' heel, especially in smaller teams. Because what if a software developer resigns and no one really knows exactly how systems work? This can partly be overcome by hiring (and informing) enough people, and partly by keeping extensive documentation of all software. Then that one software developer is simply replaceable.
This way you make yourself (and others) redundant
For a dream exit, as a director-major shareholder (DGA) go through these steps.
- Make a plan to make yourself redundant several years before you intend to quit. Most important question: do I have talents in the company who can succeed me as director, or should I hire them?
- Don't bet everything on one person. Director-owners often still have all the reins, but a growing company needs a professional management team. Moreover, it is not certain that everyone will stay after the sale.
- The most important thing to taper off if DGA is customer facing. Customers are often loyal to the entrepreneur. It is important to get them used to a new face.
- HR is also an important point, especially in the current one war on talent. Take a step back. Let other drivers make decisions for the future. And when you hire new drivers, let them know about your plans right away. This enables them to take responsibility and slowly but surely prepare the entire organization for your dream exit.
- If an entrepreneur manages to make himself redundant, this makes his company interesting for both strategic buyers and investment companies. Especially the latter will want to welcome the new management team as shareholders. Make this a topic of discussion with the management team, so that conversations are conducted with an open mind.
- Finally, also check in other departments of the company: a buyer will not only check whether the board is replaceable. The replaceability of other important employees also counts for the value of your company. Tip: if some employees turn out to be really irreplaceable, offer them a stock appreciation rightsagreement (SAR): an agreement that allows employees to benefit from the increase in value of the company without buying shares themselves.
