At Nash Advisory we sell between 10-15 companies per year ranging in size from $15 million in value to over $200 million.
Often when we first meet a client there is a high degree of key person risk residing with the founders, or key person risk with one of two persons in the management team.
In many cases the owner of the business is the CEO, and they wish to sell the business and move onto retirement or transition within a matter of months.
In the eyes of a buyer key person risk creates:
- Uncertainty as to how the business will trade in the months post sale
- Uncertainty around the team
- The risk for immediate loss of key day-to-day business operational know how
Often there are some clear gaps in the management team which the founder or owner has filled.
All of these factors result in deal anxiety which leads to a lower number of bidders, and lower business valuations.
Often Nash will recommend to our client that they engage an interim executive (CEO, CFO or COO) for the business in order to reduce risks and increase the likelihood of a potential sale.
What is an interim executive?
A person who is hired on a set short term contract to assist the business for a fixed period of time and a fixed outcome. For example:
- A CEO is hired to stabilise the leadership team and grow the business whilst it transitions towards a sale, and a new owner
- A CFO is hired to assist the company with the heavy lifting involved with a sale of the company
- The interim executive can assist to map out the full position description in the business and to hire a long term replacement
When the company is sold the new buyer knows that they have the full attention of the interim executive for a number of months, and they also have the ability of offering that person full time employment. The key person risk around the founder is significantly diminished in this situation for the buyer.
What are the pros and cons, and financial consequences?
Engaging an interim executive can net the owner of the business a large increase in sale proceeds, simplify the process, and improve the overall business.
The negatives are the need to deal with one more person each day, and the short term cost is expensive compared to traditional employment.
A real-world case study with a Nash client
Our client was a husband and wife family business with limited leadership team outside of the founders
- The founders were seeking a sale of the business, and quick retirement
- A price of over $10 million was acceptable to the owners
- Nash began our engagement by undertaking a deep dive on the business with an Octogon Review. Several recommendations were made for the short and medium term which could improve the business.
- One of these was to reduce key person risk by exploring an interim CEO, and to consider using EIM, a trusted firm that Nash has known for many years
- An interim CEO was hired in the business within 2 weeks
- The interim CEO came in and assisted in preparing the business for a sale (hyperlink to old article), executing short term strategy within the existing business plan, taking responsibility away from the founders
- The daily cost of the interim CEO was $2,400 per day – high by industry standards for this size of business
- After 6 months the interim CEO had grown the business, hired additional quality staff, improved systems, and also had developed a pipeline of opportunities to target in the next 6 months
- Nash took the business to market and the CEO held a number of pitch meetings with prospective buyers. Bids were received and the company endured transaction due diligence which was time consuming as usual
- The founders of the business were relatively hands off during the sale process and did not face Q&A nor many face to face diligence meetings
- The business was successfully sold for total consideration of approximately $15 million
For an up-front investment of $600,000, the founders received an additional $5 million in proceeds upon the sale, being a 700% return on investment.
- Engaging an interim executive can increase the probability of selling your business, and the proceeds from a sale
- Interim executives can be sourced quickly and have experience in managing the transition, and potentially a business sale
- The short-term costs can be high, but the benefit can far outweigh the costs – with a very strong return on investment achieved in the last case study by Nash