This article is an excerpt from the Shortform book guide to "Built to Sell" by John Warrillow. Shortform has the world's best summaries and analyses of books you should be reading.
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What is the importance of management in business? How do you build a team of managers that will last?
In Built to Sell, John Warrillow claims that if you want to sell your business, you need to have a good team of managers in place who will stick by the change. This way, you can trust they can oversee every aspect of the company without you.
Continue reading to learn more about the importance of management in business.
Build a Team of Managers and Incentivize Them to Stay
Warrillow claims that if you want to sell your business, you next need to prove you have a capable management team that is likely to stay with the company after the sale. This represents the importance of management in business, as your management team, whether it’s a single manager who knows the ins and outs of the business or several managers with a variety of expertise, should be able to oversee every aspect of the company without you and have the ability to deal with any potential issues.
(Shortform note: Warrillow focuses on how to incentivize good managers to stay with the company, but you’ll also need to know what makes a good manager. In The Making of a Manager, Julie Zhuo mentions versatility as one of the qualities of a good manager, which aligns with Warrillow’s advice on having a manager who understands all aspects of your company. She also states that a good manager should be accountable, team-oriented, and work well with others.)
Potential buyers of your business will also want to be sure that the management is likely to stay with the company long-term. Warrillow argues that as the owner, it’s your responsibility to find the right way to incentivize managers to stay after you sell the company. The most effective way to do this is to create an extra bonus account that they can only withdraw from after a certain period of time. For instance, each manager gets an additional yearly bonus put into an account. After three years with the company, they can withdraw up to 25% from the account each year. This way, if they decide to leave the company, they’ll be leaving a lot of money on the table.
(Shortform note: In addition to monetary incentives, there are other ways you can ensure your managers stay with your company after you sell it. One way is to encourage managers to connect with their employees. Managers who focus on building strong relationships are not only more effective, they are more likely to stay with the company because they feel valued. You should also provide managers the time and space to help and learn from each other. Peer support can provide unique insights and growth opportunities that top-down feedback can’t. If your managers feel they are connected with their employees and supported by their peers, they’ll be much more likely to stay after you’re gone.)
Warrillow also advises against offering managers equity in the company or a share of the profits as long-term incentives, as both of these can make a sale more difficult and create conflicts of interest.
If you give a manager a stake in the company, you’ll not only lessen your own stake, you could also further complicate the sale of the business because you now have a part-owner whose input you’ll have to consider. They might not be as inclined to sell the company as you are, or a potential buyer might not want to purchase a company with multiple owners. If you give managers a profit share, they might oppose decisions that slightly decrease short-term profits but make the business more attractive to potential buyers, like cutting out a big client because they no longer fall under your specialization
(Shortform note: Warrillow advises against offering equity as compensation for managers, but it’s a fairly common practice, and it does have its benefits. For instance, offering equity in the company can help you hire strong candidates on a lower salary. This can help free up cash flow to expand the business. Furthermore, though managers with equity may complicate a potential sale of the business, equity can also boost manager morale and productivity because they have more agency and more incentive to improve the company. Thus, offering equity may actually increase the chances you sell your company.)
Informing Your Managers
According to Warrillow, telling your managers you plan to sell the company can be a tricky and uncomfortable situation. If you own a small business, you’ve probably worked closely and built a relationship with your management team, and they may not be happy to hear you’re selling the business. The best time to tell them will vary depending on your situation, but Warrillow recommends letting them know once you find a potential buyer. The potential buyer will want to set up a meeting with you and your managers to get a feel for the company. Obviously, you don’t want your managers to be blindsided by this meeting.
(Shortform note: Other business experts add additional reasons to inform managers early of a potential sale. The National Federation of Independent Business (NFIB) recommends you involve key managers in the process early so they can support the transition and answer other employees’ questions regarding the sale. An M&A expert notes that informing management early is important in maintaining trust and ensuring management stays with the company after the deal is complete.)
Though you may be nervous to tell your management of your intentions, there are a few things you can do to calm your anxiety. First, recognize there are potential benefits for managers if you are bought out by a larger company. For example, they might have more room for upward mobility and opportunities for raises as part of a bigger business. Another thing you can do is to offer management a one-time bonus for the sale of the company. This will show that you appreciate their efforts and give them a pick-me-up as they deal with the transition.
(Shortform note: Warrillow notes the benefits managers may see if their company is sold, but it’s also important to be aware of the potential drawbacks your employees face. Historically, when a business is sold, jobs are cut. Senior management positions in particular are in danger because the acquiring company already has management in place, and they’ll want to reduce redundancies and increase efficiency. Another drawback is the potential change in culture your managers may face. Bigger companies may be more organized, but corporate culture can be a major deterrent for some managers.)
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Like what you just read? Read the rest of the world's best book summary and analysis of John Warrillow's "Built to Sell" at Shortform.
Here's what you'll find in our full Built to Sell summary:
- A step-by-step process for building a business you can sell
- Why you should build a sellable business even if you don't intend to sell it
- How to manage the selling of your business and all the headaches that come with it
