The true value of a business is driven by much more than market pricing and financial models. Any buyer of a business will include employee capabilities, employee retention, and business culture in their valuation.
They will use these factors to both help select acquisition targets and also identify any risk factors. As a result, if you are thinking about selling your business and wanting to maximize its value, then you too must have thought about your workforce and corporate culture. Importantly you need to address any issues in this area long before you sell, sometimes even years before.
Buyers recognize the contribution that the leadership team and employees make to sustain ongoing financial success. They also want to retain leaders to set and ensure standards continuity/implementation post-sale.
Business success relies on its team.
Any valuation and successful exit strategy rely on the team.
Two main people factors need to be considered.
1 - Proven Competency and Capabilities of the team drive the value of the business.
A key value of people comes from their competency to meet customers’ requirements.
Competency is not measured by years of service, training, or self-declared ability. Competency is a measure of doing a task successfully, efficiently, and on time. For a TIC business, this would include job assignment, testing, calibration, or inspection method, etc. The better the competency of the employees, the more the value of the organization increases. Additionally, rework, errors, and the like are all reduced.
In addition to competency, the value of the employees extends to their capabilities. Employees who have multifaceted capabilities can increase the flexibility to quickly take on a higher volume of work and be able to work in several different areas. This translates directly to the overall capacity of the business.
There are multiple benefits of properly addressing competency and capabilities. There are increases in business utility, and value to its customers.
From a buyer’s perspective, the addition of more competent and capable people will strengthen the buyer’s team. From the team perspective, they will also have an opportunity to grow with the buyer and will be exposed to different career opportunities.
One other key benefit is the increase and sustainability of the valuation of the business.
2 - The value of a business will reduce if the staff is not retained.
Successful TIC businesses pride themselves on serving their customers well by employing methods and people to satisfy and retain them. While business methods and processes can be documented and can be relatively easily retained, the retention of leadership, technical and customer-facing people is not formulaic. Every employee is different. Their motivations to stay and the strategies to retain them will vary.
It is necessary to understand the customers’ perspective to fully appreciate why retention is so important. Customers are more likely to form a positive perspective of a company from its current performance and be less concerned with a company’s history. Additionally, customers need constant reassurance that in the future, all the key factors will at the very least be maintained. For a TIC company, these factors would include timely order to delivery processes, appropriate customer service interfaces, and of course competent technical support.
If customers are concerned that performance will be affected in the future, they will be less likely to stay with a particular TIC business after any major change. If potential buyers believe there is a risk of losing customers, they will decrease the value of the company to offset that risk.
Consequently, before any sale, a strategy must be developed to retain key staff (and therefore their profound knowledge, process efficiency, and customer relationships). The presence of such a strategy will reduce the buyer’s perception of risk and support a higher valuation for the business.
Building a credible employee retention plan is a vital part of an exit strategy, providing confidence that there will be an orderly and comfortable transition.
Competency and Retention are even more vital in a TIC Company.
While TIC companies can be described as Service Companies, the importance of the people is more important than the “average” service company. The importance of competency in a TIC business can have a fundamental effect on safety – it is not an exaggeration to say that TIC companies can face life or death issues. Failing to retain key staff after a sale will create doubts in customers’ minds. They will be concerned that the levels of competency will fall.
It is not easy to recruit a competent team; it is not easy to train them to meet your standards. They are not easy to replace.
In summary, an in-depth understanding and verification of employee competence and a detailed retention strategy are vitally important not only to the ongoing success of a TIC business but also to its valuation.