In light of Steve Job's resignation from Apple, I thought it would be a good time to write about how Hadley Capital evaluates leadership transition in a small business.
We typically buy businesses from owner/managers who want to retire, either immediately or over the next few years. If the owner is the most valuable person in the businesses, which is often the case, our transition risk is higher. This has a negative impact on value. If, on the other hand, the owner/manager is not the most important person, and there are lots of other important people working in the business, then our transition risk is lower. This has a positive impact on value.
Here are some questions we seek to answer when evaluating the transition risk associated with a target company:
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If the owner were absent, is there someone that could run the day-to-day operations of the business? If so, who? And what are that person's strengths and weaknesses?
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Do all the employees in the company report to the owner or are there other key managers?
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Did the owner create all the intellectual property in the business or did other key employees play a role?
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Does the owner make all the important business decisions?
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How difficult would it be to hire someone from outside the company to replace the owner?
Just because an owner/manager who wants to retire is important to a business doesn't mean that Hadley Capital can't buy it, only that we need to first think through how we might most successfully transition it to another manager or team of managers.
