Non-executive directors’ (NEDs) role within businesses has become increasingly important over the last few years, evolving from its historical principal focus on corporate governance, which remains important, to a more active involvement in advising on operations and strategy.
Nowhere is this better illustrated than in the critical role NEDs can play in a sale process.
NEDs can provide a range of insights to help facilitate business sales, from giving an objective view on the capabilities of the management team and helping to increase the range of potential buyers through their networks, to bringing experience of selling a business and adding credibility to a company’s board based on their previous experience and past successes. In short, the role played by NEDs in the sale of a business can be vital.
Below are outlined the key areas where NEDs can add most value in the sales process.
Assessing the management team:
People are one of the best assets of any successful company and a key factor in attracting buyers. An NED can provide an objective assessment of the management team to ensure that the right people are in place to drive the company forward and convince buyers that the business will meet its strategic goals and the valuation they have placed on it. If any weaknesses are identified, then an NED is well placed to be part of the search process for fresh senior executive talent.
NEDs are also important in succession planning. If an entrepreneur is to leave the business at sale then typically 12 moths beforehand the process of looking for his successor will begin and an NED can often lead or provide significant input into this process. If an entrepreneur is to stay on for a period in a more non-executive capacity, which is not an easy adjustment for most to make, often the help of supportive NED can ease this transition.
Identifying a broad range of buyers:
Having a broad range of potential buyers is critical to a successful sale. Therefore NEDs with a broad contact base spanning various sectors, who can identify buyers from alternative markets or even overseas, or who also have specialist sector knowledge, allowing them to give a detailed profile of the type of buyer, are key.
With Chinese or Japanese buyers, where the sales process can often be much longer, NEDs are often able to begin initial, informal conversation early, to smooth the way before any full formal talks and negotiations might begin.
More on exit strategies:
Providing sell-side experience:
Selling their business is probably the most emotionally testing experience for any entrepreneur. Trying to balance running a business as well as negotiating its sale requires a significant commitment of both time and energy. NEDs with significant experience of being involved in the sale of businesses can alert entrepreneurs to the potential pitfalls and stress points, act as a coach and emotional sounding board, and help guide them through the process and hopefully achieve a successful sale.
Acting as brand ambassadors:
As well as providing invaluable additional skills and insights, NEDs can also enhance a company’s board, adding gravitas and credibility if they have the right background. Having a high-profile chairman or senior NED, who have achieved considerable success in the company’s specific or allied sectors, can help reassure potential buyers and give them confidence that management has the wise counsel, strategic vision and support to build broad relationships which can help the company thrive and justify a robust valuation.
More on non-executive directors:
- The importance of regularly ‘refreshing’ NEDs
- Are non-executives non-essential
- AIM non-executives poorly managed
Advising post sale:
After the sale process, NEDs are often well-placed to advise entrepreneurs on their next steps. For example, some entrepreneurs may want to continue to work under the new owners, while others may want to leave entirely, or become executive chairman for a transitional period – or simply to aid the search for a new CEO. Having the advice of an objective third-party who will often have had to make similar decisions helps ensure entrepreneurs are making the right decisions on their futures.
Rewarding with equity:
NEDs’ greater role in a business, in particular in the sales process, has raised the issue of how they are remunerated. In private businesses, particularly where a sale is being contemplated, including a portion of equity in a NED’s compensation package is reasonable and helps to ensure the interests of the executive and non-executive directors are aligned.
Recruiting NEDs who have been through sale processes previously, as opposed to simply adding corporate finance experience to the board, can help management achieve the optimum price for the business. In the case of companies owned by private equity houses, typically well versed in exits, NEDs may play a less substantial role, but can still be a trusted source for recommendations on which law firms, corporate financiers and other advisers to be retained on a sale.
The ideal NED for a sale process is one with the experience to give the right advice, but without challenging the authority of the CEO. The NED is not there to try and take charge, but to add value in the sales process – and therefore in achieving the best price for the business too.