Most privately owned businesses will be managed by a relatively small team. Often it can be a team of ONE.
As a business grows organically and possibly through acquisition there is sometimes pressure from external stakeholders and lenders to broaden the management team. This means introducing individuals with complementary skills such as Finance, HR, Marketing, or Customer Service.
This can present challenges in terms of recruitment, effective team building and of course the cost which is directly linked to the owner’s remuneration. Even as the business grows it is unlikely it will need an FTE (Full Time Equivalent) in all these roles. There is more likely to be a requirement for a few hours a week or some occasional advice.
When lenders value business for funding, they look at the overall strength in depth of the leadership team. It is considered a good indicator of the sustainability of a business. It is a key focus for lenders if the owner is looking to finance a growth plan or for a buyer who wishes to buy the business.
So, let’s consider what a business team actually is?
A business team is a group of people who work together to achieve a common goal. It can be made up of people from within a business, or it can be a group of people from different companies who come together.
Lenders will often view a management team of two or more individuals positively. Responsibilities can be shared, and there is a range of ideas and skills that the business can draw on.
If there are complementary skills within the group, then these can be leveraged. From a lender’s viewpoint a team provides a more balanced platform for decision-making and can provide an answer to succession issues.
From a purely practical perspective a team structure provides cover for training, holidays and sickness. This reduces the pressure on management which can curtail creative thought.
A lender will have financial management high up on their list of priorities. 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.
Consider some other options.
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 on resources within their personal and business support network to bridge the gap. Keeping direct overheads down until a growth in income and profits has been achieved can then sustain a permanent increase in staff costs.
If you cannot afford widen your senior management team at the present time then these strategies have proved effective.
- Consider any Directors or Financial Professionals in your wider network. If they have contributed formally or informally to management decisions or offer support in any way, then mention this to the lender or investor.
- If you do not have a Finance Director then a good relationship with a proactive accountancy company could be the answer. Getting the help of one of the Partners with whom you discuss major strategic decisions will be beneficial. It will also but provide the stakeholders with some comfort that there is an independent sounding board available.
- If you have a Financial Controller or Practice Manager, then it is important to highlight their qualifications and experience. A Bank will want to be assured that the Financial Management of the business is sound and appropriate levels of information are available to management.
- Legal firms are often overlooked. But if they are a source of regular advice then they can be presented as positive contributors.
- Do your advisers have a sector specialism? If they do, then it is worth highlighting. Particularly if they have a lot of clients in your industry sector. The lender’s thinking will be that the client will receive up to date advice on matters impacting your sector. This will help to reduce risks.
- Non-Executive Directors can play a role. Also consider the alternative of an informal relationship with a more experienced mentor operating in your sector.
In conclusion:
Expect your lender and other financial stakeholders to look at the breadth and depth of your management team when making investment decisions. 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.
This article was written by Christian Reilly, Associate Director of Lily Head Finance. It was first published in the September 2023 edition of The Dentist Magazine.
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