2nd Key Area: The Importance of Human Capital Management in Small Businesses

^{“In the long run, your human capital is your main base of competition. Your leading indicator of where you're going to be 20 years from now is how well you're doing in your education system.” ~ Bill Gates}

There are Five Key Areas in every company that impact the value of your business at the negotiation table. In our last article on the Growth To Exit® Blog, we discussed the Legal Area and identified areas to review, to ensure that best practices are embedded.

As a reminder, the five keys areas include:

1. Legal
2. Human Capital
3. Finance & Accounting
4. IT/IP Systems
5. Sales & Marketing

In today’s article, we will focus on the Human Capital aspect of your company.

Inside Growth To Exit®, we believe that management and protection of Human Capital is essential to the success of your business. Human Capital is the life force of a company, because it runs all of the other four key areas (Legal, Finance & Accounting, IT/IP Systems, and Sales & Marketing).

Human Capital is a broader concept than Human Resource Management, because Human Capital is the high-level view of your talented professionals and employees. When you, as the owner of your business, recognize and protect your best employees, a potential buyer will have more confidence in the profitability of their new asset after the sale.

Why is Human Capital so Important?

Buyers have many different reasons why they are interested in purchasing your business. Sometimes they want your customer base, sometimes they want the revenue, sometimes they want your products or services. Another critical factor that buyers will evaluate your company on, is the talent, the level of skills and professionalism that the people that run your business have.

In many cases, buyers want to keep one, two, three or more employees of the seller, therefore the evaluation of your employees is critical for the sale of your business, and is a starting point for you as a seller. Additionally, buyers are interested in your key customers, and to retain those customers post-transaction, it is important to understand which of your employees have the best relationship with your loyal customer base.

Remember, Preparation Prevents Poor Performance. Everything that you can do pre-sale, before you try to close a transaction, adds value to your business. So, do not expect the evaluation of your employees to start with a potential buyer. You will firstly have to evaluate your Human Capital yourself before proceeding with the sale.

Many inexperienced sellers tend to procrastinate when it comes to the future of their employees, and leave HRM to the side as a less important matter of the sales process. The reality is however, that your people make or break your business.

Who are you going to keep? Who's going to get terminated? The ones that are going to get terminated, do they get a performance bonus or a sale bonus or a success fee for leaving? Are there non-competes involved?

Other issues are raised when a key employee leaves the company, either before or after the sale. That person has intimate knowledge of your best customers, where the flaws exist in the sales, pricing, or manufacturing process, and the intellectual property inventory. If you don’t identify these key employees and have them agree to a Non-Compete, it creates uncertainty and risk. Always remember, Buyers do not like uncertainty and risk.

Dealing with all those issues earlier in the stage of a transaction is always better, because when you make decisions around your employees, you have to talk to them and let them know in advance.

The Bottom Line

Human Capital Management is critical for the successful operation of a business, but it is also equally important for its sale. We go into much more detail about Human Capital Management in Module 7 of the Growth To Exit online course.

There is no doubt that managing employees is difficult for a number of different reasons. Employees tend to become part of the company's family, because they have helped get the company to where it is today.

However, an objective evaluation of your employees is absolutely necessary in a sales transaction. So, managing the process around dealing with your employees, whether they're low-level employees or senior executives in your company needs to be done sooner rather than later.

In our next installment of the Five Key Areas series, we will take a deeper dive into the Finance & Accounting department.

Your company is the product. Growth to Exit® is the process. The Buyer is your customer.

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