Buddy Hobart sees it time and time again. Business owners don’t invest relatively small amounts of time, money, energy and effort into leadership development. Then — when it comes time to sell — they don’t have an internal succession plan. They end up leaving hundreds of thousands, if not millions, of dollars on the table.
“If you peel back the onion, what you would find is the companies that are getting eight, 10, 12 times EBITDA, are the companies that have a solid pipeline of talent,” says the founder and president of Solutions21, a consulting firm that helps companies develop next-generation leadership.
We spoke with Hobart about the value of talent in today’s M&A market.
Why is leadership development so critical to a merger or sale?
An acquisition or a merger usually does not fail because of financial reasons, it fails because of fit.
On the private equity side, if they are looking to invest in a business, the first thing they look at is cash flow and the balance sheet. But the second thing they look at is leadership succession. Are we able to retain the knowledge capital of this business?
What saddens me is that a lot of small to medium-sized businesses have not taken the time to create an ongoing process for leadership development. Statistics show that a business is, on average, worth six times EBITDA. By having a leadership plan in place, where you’re retaining that knowledge capital, you can add two times EBITDA to that. So, it could go from being worth six to eight times EBITDA. If you have a $1 million EBITDA, you just left $2 million on the table by not retaining the knowledge and not having a knowledge transfer plan.
This isn’t a problem that can be fixed overnight, right?
If you’re thinking about a sale, even in a year from now, it’s not that it’s too late. It would have been better had you started three to five years ago. But you should start now to prove that you have a way of developing future leadership, because some of your future leaders might be 30. So, how are you developing that 30-year-old, if you’re looking to sell your business in the next one to five years? That really should be a strategic initiative, and you should be put some investment into that. It’ll pay back in spades.
What variables are ratcheting up the value of talent even more?
The last time the United States was under a sustained 4 percent unemployment rate was 1969. So, that was 50 years ago. In my experience, there’s always been some lip service given to the ‘war on talent,’ ‘employees are our greatest asset,’ and all that — up until the last two or three years, where they actually have become a scarce resource.
It’s demographics. There’s 78 million baby boomers and 60 million Generation Xers. So, there’s a gap of 18 million people, just in pure demographic numbers in the United States. There aren’t enough members of the next generation to replace baby boomers, which means you’d have to reach down into the millennial generation, who aren’t kids anymore. The oldest in this group are going to start turning 39 this year. There has not been an investment in helping them develop their leadership. It’s unprecedented in business.
Business owners are caught off guard a little bit because since the industrial revolution, the next generation has always had at least, if not more, people than was needed to backfill the previous generation.
Do you think buyers or sellers have the advantage?
Advantage to the seller that has talent. Advantage to the buyer that can find the proper cash flow and markets and all that, where they have talent to insert. I mean, quite literally, several times multiples.
I personally had three smaller clients in 2018 who bought larger organizations because my clients had the talent to plug and play, and the other folks didn’t.
If employers are investing in next level leadership, how can that manifest?
Our clients, because that’s why they’re our clients, have proactively invested in leadership, which has helped them A) be able to take advantage of opportunities as they arise and as the buyer has the advantage, or B) be able to expand their markets because they have the talent, and not have to grow in one area while they suffer in another area. And then also, C) they’ve been worth more because talent goes along with the purchase.