Should You Replace Yourself First?

This is a very important question, but with a few different answers. Many business owners believe they need to put a good Managing Director in place so that they can demonstrate to an acquirer that the business is not dependent on them as the owner. Of course, this makes sense, but it does come with a number of disadvantages that you need to be aware of.

The first one, and the one I come across most often, is whether you are willing to pay your ‘replacement’ the right kind of salary to attract the right level of skills. Can the business afford the right person? In fact, the key issue many owners do not want to admit to, is whether you have the skills required to manage your replacement, or are you simply going to go through a churn of trial and error candidates but never achieve what you set out to do? In my view, the idea of replacing yourself purely to facilitate a sale is highly overrated. You cannot predict what will suit an acquirer, and you do not know whether they would want to ‘bolt-on’ your business to an existing operation that already has sufficient capacity in terms of management depth and expertise to accommodate your business. You may believe that your replacement needs to be at your level, but within their operations that may be too high, and a more junior person would be preferable. In these cases, replacing yourself would probably have added costs to the acquirer and could possibly reduce the value of your business in their eyes. Replacing yourself as the operator of your business can make complete business sense, but be careful not to do it for the wrong reasons. It is true that if your business is highly dependent on you as the owner/operator, then this will impact the structure of your deal and may encourage your acquirer to push for earn-out structures to manage his risk. The way to deal with this is to find alternative ways to manage the acquirer’s risk, rather than assuming that an earn-out structure is inevitable.