Management Teams…. leveraging your business network.
Most privately owned businesses will be managed by a relatively small team … often that can be a team of ONE. As the business grows organically, and possibly through acquisition, there is sometimes pressure from external stakeholders to broaden the management team and introduce individuals with complementary skills or specialists such as financial for example. This presents issues in terms of recruitment, personal chemistry and not least implications for the budget and owner's remuneration. An alternative to bringing in additional senior management might be to look first into the skills and expertise you might be able to call upon from within your own business network.
What do lenders look for?
As a business grows in size and complexity, the likelihood is that the original business owners will face conflicting demands on their time and a requirement to develop ever greater levels of expertise in important functional areas such as Sales, Marketing, Human Resources Management and Finance. Lenders will often view a management team of two or more individuals as a positive because responsibilities can be shared. If there are complementary skills then this can be leveraged and from the lender's viewpoint a team provides a more balanced sounding board for decision-making and can provide an answer to succession issues. Also from a purely practical viewpoint, a team structure provides cover for training, holidays and sickness without which the pressure on management can be too intense and over time threaten to drain energy and curtail creative thought.
A lender will have financial management high up on their list of priorities and financial risk tends to increase in direct proportion to the scale of the business, so often the early pressure from stakeholders is to recruit a financial manager if the business owner does not have that background.
What are the alternatives?
Increasing the management team will increase fixed costs quite significantly and the debate with a lender will often focus less on the necessity of the recruitment but more on the timing … in other words should this investment follow on or precede the anticipated growth in the business? Our thinking is that the business owner may be able to call upon resources within their personal and business support network to bridge the gap; keeping direct overheads down until the growth in income and profits has been achieved that can sustain a permanent increase in staff costs.
So if you do not want to, or cannot afford to widen your senior management team at the present time consider the following:
1. Have you got any Directors or Financial Professionals in your wider family or amongst your friends? If they contributed formally or informally to management decisions or offer support in any way then this is worth mentioning to the lender or investor
2. You might not have a Finance Director or an internal accounts function head, but if you have a proactive accountancy firm and a good relationship with one of the Partners with whom you discuss major strategic decisions, then that is important and will provide the stakeholders with some comfort that there is an independent sounding board available.
3. If you have a Financial Controller or Practice Manager then it is important to highlight their qualifications and experience – the Bank will want to be assured that the Financial Management of the business is sound and appropriate levels of information are available to management.
4. Legal firms are often overlooked but if a source of regular advice, then they can be presented as a positive contributor – identifying areas of risk and calling on professional support to mitigate is a positive and a good example might be perhaps a recent review of employment contracts.
5. Do your advisers have a sector specialism? If they do then its worth highlighting, particularly if they have a lot of clients in your industry sector. The lenders thinking will be that the client will receive up to date advice on matters impacting your sector and this will help to reduce risks.
6. Non-Executive Directors can play a role but also consider the alternative of an informal relationship with a more experienced mentor operating in your sector who is free with advice on strategy or perhaps practical operational issues.
Expect your lender and other financial stakeholders to look at the breadth and depth of your management team when making investment decisions and particularly where the business is on a growth trajectory or just about to embark on a change of direction, acquisition or step up in activity. Do not expect these stakeholders to necessarily be aware of any of the potential mitigating factors highlighted above – this is something you will need to draw to their attention.
Presentation of the Non-Financial profile of a business is as important as detailing the strength of your Financial Plan. A specialist in corporate credit analysis can assist owner-managers by identifying some of the important details that are often overlooked but can make a big difference as to how a funder assesses credit risk, debt capacity, terms and cost of your funding.
About The Author
Martin How MA (Oxon), ACIB, is a Medifinance Consultant.
Martin was a senior manager in the financial services industry for over 35 years, leading commercial lending teams across a broad geography and working with a wide range of business sectors. Martin is an Associate of the Chartered Institute of Bankers and holds a Certificate in Credit and Certificate in Healthcare from the ifs School of Finance