Management buyouts and buyins in particular are driven by the faith of investors in the senior team. Deal due diligence, however, often only focuses on quantitative and financial measures to determine the commercial health or viability of the business.
But how do you know whether the management team or individuals within it are up to the job? What is the quality of the next layer of management: is succession adequately planned for? They may have excelled technically and may even have demonstrated some competence in new environments.
But will they be able to cope with an aggressive expansion strategy or where the business needs downsizing? Will the new management in a buyin integrate with the incumbent team? Identifying whether the team and individuals truly exhibit these qualities is not straightforward.
For some deals, the due diligence exercise should be broadened. There are a number of techniques for minimising the risks that emanate from backing particular managers and teams.
For example, background checks by business intelligence experts can provide greater insight on an individual. This approach is often overlooked, or even avoided, conjuring up stereotypical images of undercover ‘dustbin’ digging. Instead, preferably with the approval of the candidate manager, the process typically involves interviews with former colleagues, others in the industry, and the use of public sources to carry out fundamental CV checks.
But how do you get a handle on the competence of an individual team?
Human Capital practitioners are now using some sophisticated tools for defining competencies to match a particular business strategy. They then use systematic approaches for measuring the team and individuals against these. Techniques may include rigorous interviews, scenario exercises and observation.
Gaps in competencies are then addressed through training or where necessary, replacement. If serious weaknesses are identified it may be that alternative individuals can be found. If this is not possible and the deal falls through, that is perhaps the surest evidence that the exercise was worthwhile. – Lionel Young is a member of the executive committee of the Corporate Finance Faculty (www.icaew.co.uk/corpfinfac) and a partner at Deloitte & Touche.
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