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Your guide to grooming new management

Imagine your own ‘reality television’ show. You, the vendor, are the main player and, alongside you are the other ‘judges’ —your accountant, your lawyer, your banker and your financial adviser. It’s time to meet the contenders for New Zealand’s Next Top Management Grooming.

Imagine your own ‘reality television’ show. You, the vendor, are the main player and, alongside you are the other ‘judges’ —your accountant, your lawyer, your banker and your financial adviser. It’s time to meet the contenders for New Zealand’s Next Top Management Grooming. 

Episode One: Judgement day

•    You select a successor, and make it known to that person.

•    You ensure a management information system exists for the successor, so that all sensitive information, systems etc are available to the purchaser on the vendor’s exit.

•    In grooming a candidate, you are: patient; willing to let the prospective purchaser make mistakes; skilful at using the mistakes as a leverage tool for the learning process; good at communicating; and establishing reasonable expectations for the purchaser

•    At all times, even though there might be tipping points of frustration and doubt, you maintain and promote an environment of trust and respect.

Episode Two: Spotting the ‘right stuff’

•    You’ll adopt a grooming process. The feasibility stage will be spread over a period of time, and you and your successor will be working together on the business and strategic plans.

•    The grooming process should include an assessment of operational, specialist and financial skills. The ‘anointed one’ should be undertaking their own review to satisfy themselves that any changes they wish to implement would be sustainable.

•    Encourage the use of external advisers to assess the potential success or otherwise of the venture.

•    Pitfalls and the unexpected can happen. These include:  The need to maintain the purchase on an ‘arm’s length’ basis; Employees entrenched in the business may not be aware of external technology, and the current technology in the business may have been superseded;  The need to have a sustainable business plan for the future

Episode Three: Creating the ‘dream team’

•    A team should be appointed, with sufficient breadth of commercial skills to complete the transaction.
•    Financiers need to be satisfied that the buy-out team has the skills required to maintain and run the business.
•    Potential purchasers need to know at an early stage the likelihood of obtaining the level of finance required to fund the acquisition.
•    The team should prepare a summary document including copies of the current business plan, cash flow and funding projections.
•    Bear in mind that it is not necessarily essential at the early stage to get full details of the finance structure.

Episode Four: Where’s this business going?

•    Grooming means the purchasers will be involved in development of any business plan, taking ownership of various issues, and are becoming aware of the key aspects of the business. The planning process will also allow them input to the direction of the business.
•    Producing a business plan will also help everyone understand the skill sets of those involved and where further training or skill development is required.

Episode Five: Show me the money

•    The grooming process gives candidates insight into what really drives you in the business, allowing for a funding scenario to reflect each parties’ needs. As the time gets closer to sorting out formal arrangements, the team either does this themselves or gets an adviser to assist—bearing in mind that an external party can be more impartial, and provide the arm’s length required.
•    Similarly, an external negotiator can strengthen the bargaining power of the management team, as they will not be directly seen to be jeopardising the owner’s return.

Episode Six: Overcoming the final hurdles

•    At this stage, your requirements should be identified so that everyone knows that what the result needs to be. Again, it may be that during the transition phase you’ll want to sell down on an instalment basis, reducing the level of the borrowing commitment.

•    By this stage the dynamics of the buy-out should be crystal clear.

•    The buy-out team member’s equity shares need to be agreed.

•    The customer base needs to be preserved during the transition. You should ensure that the customers know the purchasers.

•    Similarly, the buy-out team will require the suppliers’ continued support to maintain the business. You should ensure that the management team are familiar with key suppliers and help them build strong relationships.

This story originally appeared in Succeed.