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    How the Human Capital Driver Enhances Your Business

    4 min read time

    In 1999, management guru Peter Drucker stated, “The most valuable assets of a 20th-century company were its production equipment. The most valuable assets of a 21st-century institution, whether business or non-business, will be its knowledge, workers, and their productivity.” Your business’s ability to attract, train, and retain human capital – employees – is crucial to driving the greatest value in a sale. Your buyer needs to know that when the sale is completed, the remaining team will continue to execute on strategic initiatives. This sentiment applies at all levels of your business’s hierarchy, from the CEO to the most junior employee.

    How the Human Capital Value Driver Enhances Your Business

    Senior Management

    When buyers assess your business’s strength, they spend a lot of time getting to know your senior management team because, in most cases, buyers are not interested in running your day-to-day operations. Buyers need to be confident that your remaining senior management team will continue to operate and perform.

    Buyers also address your key person risk, which is the risk that your business relies so heavily on a single individual to operate successfully, its profits and productivity would suffer if that key person were no longer to be involved. In many cases, the key person is the business’s founder who is still intimately involved. Developing a strong management team mitigates your key person risk and gives buyers confidence that the remaining team will continue to operate and carry out the new ownership team’s goals, which means your management team must have a track record of successfully executing leadership directives.

    Buyers review your entire history, so your business must present a cohesive background that demonstrates your leadership team’s clear vision for the business. Your history should include important successes (and possibly failures), such as market expansion, product development, changes in leadership, strategic partnerships, and shifts in strategy. In the event of an unsuccessful initiative, buyers will want to know why the initiative failed and what lessons you learned to avoid such failures in the future.

    In addition to sharing its vision, your senior management team is responsible for creating, driving, and enforcing a corporate culture that focuses on the business’s success and all employees’ overall happiness. Your corporate culture needs to radiate through all levels of the entire business and must be evident to buyers. Buyers should be able to witness the culture firsthand when observing operations and speaking with senior management.

    Employees

    Employees are your business’s most important resource, and in many cases, they are the face of a business because they are the ones who interact directly with customers. When buyers assess your employee base’s strength, they will analyze employee turnover and tenure. In almost all cases, lower employee turnover indicates a stronger employee base, because it shows that your business has a consistent group of experienced employees who enjoy their jobs and have irreplaceable experience with customers and processes.

    Furthermore, onboarding new employees is expensive. According to the Society for Human Resource Management, the average cost per hire in 2017 was $4,425. This figure comprises not just hard costs but also a lot of soft costs – such as manager hours (training), IT hours (computer and phone setup), and administrative hours (background checks, payroll/benefits setup, issuance of building keys, parking passes) – that management teams tend to overlook. Once you successfully onboard a new employee, it is likely that that new employee will not immediately perform as efficiently as the previous one. Generally, it takes anywhere from a couple of weeks to many months before a new employee begins to operate efficiently.

    Most employees, especially good ones, will not be content to work only one position for their entire career. Your business needs to provide employees with leadership development training so they can develop their skill sets and advance their careers through deserved promotions. By offering a leadership development program and encouraging employees to participate in it, you prove to your employees that the senior management team wants to invest in them.

    Successful companies are always adapting, whether in regard to legal and regulatory changes, technological advances, or other factors that affect their way of doing business. As such, your business needs to provide employees with ongoing education to ensure that they are properly prepared. Changes arise both voluntarily and involuntarily, and it’s your business’s responsibility to have a system to train all employees effectively on new policies. All employees must learn and implement new practices and policies; problems occur when only a portion of employees do so.

    Depending on your employees’ roles, buyers will require them to sign nonsolicitation and/or noncompete agreements, especially if they are in sales-related roles. These agreements protect the business in the event an employee leaves. You spent a lot of time and money for your employees to develop relationships, so the business should be the beneficiary of that investment.

    Employee Benefits

    Wages are a very important factor for most employees, but benefits have become an area of increased focus. It can be difficult to attract and retain top talent without a strong benefit plan, so some businesses have started offering more enticing packages that include healthcare coverage, paid time off, maternity/paternity leave, retirement contributions, flexible work locations, and corporate discounts. In many cases, work-life balance has become more important to employees than maximizing income.

    Wages, benefits, and training are all ways that your business demonstrates its commitment to employees, but employees want you to demonstrate your appreciation too. A quick thank-you email from a manager or special recognition for completion of a large project can go a long way to keep employee morale high. For his book The Employee Experience Advantage (Wiley, 2017), author Jacob Morgan analyzed 250 businesses and found that those that invest in the employee experience are four times more profitable than are those that do not.

    All team members, whether employees or senior managers, are an integral part of all businesses and need to feel and be treated as such. Your senior management team needs to communicate, provide direction, lead, and demonstrate and contribute to your corporate culture, and your employees need to execute on senior management’s strategic plans. When employees feel valued, respected, and appreciated, they are more likely to have an ownership mentality, which will increase not only the care they put into their work but also its resultant quality. Your employees’ perception of how your business treats them has a direct impact on your business’s valuation, so if your employee base is strong and committed, and working in unity with your senior management team, you can command a premium value for your business.

    This is the fifth article in our Value Driver series. Click below to explore the other topics.

    Financial Value Driver

    Competition Value Driver

    Facilities Management Value Driver

    Contracts & Agreements Value Driver

    Growth Value Driver

    Sales & Marketing Value Driver

    Thomas Harrington

     

    Thomas Harrington

    Investment Banking

    tharrington@pcecompanies.com

    Orlando Office

    407-621-2100 (main)

    407-621-2145 (direct)

    407-621-2199 (fax)

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    Thomas Harrington

     

    Thomas Harrington

    Investment Banking

    Orlando Office

    407-621-2145 (direct)

    tharrington@pcecompanies.com

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    407-621-2145 (direct)

    407-621-2199 (fax)

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