It is in these situations that the interests of the owners need particular care and attention, and it is in these situations that the board of directors needs to prove its worth and guide the owners towards defined targets. And it is in these situations that the executive team really needs the experience and help of the board.
The role of the board can vary greatly depending on the ownership form and not least depending on the different stages of the change of ownership, which I will seek to shed light on in this article. It may be challenging to external board members to find out how to best serve the company and the executive team in these various ownership set-ups. The focus of my article is on the strategic and business-related aspects of the board’s tasks with respect to sales and change of ownership – not on the legal aspects, which of course must also be taken into consideration.
THE OWNER-LED OR FAMILY-OWNED COMPANY
The board’s role in the owner-led or family-owned company is often somewhat special. The executive team are often the owners – and the board’s role is therefore often less “powerful” with respect to the executive team. The role is therefore more about offering advice than making decisions.
As the owners are always directly present in the boardroom, the obligation of the board members is that much greater – in particular for the external members. The reason is that the owners are so close to the business that they often become unable to see the bigger picture. The board (and particularly the external members) should therefore be ready to take on an advisory role to the owners and make it clear that “now is the time to act”.
Special circumstances occur if the owners/owner manager wants to hand ownership over to the new generation – also with respect to the executive roles. “The daughter is to take over from the father”. In a situation such as this, the board will also have to be very disciplined and direct in advising the owner on new owner structures, governance models and filling executive seats.
THE PE-OWNED COMPANY
The board’s role is completely opposite in connection with sale of a company owned by a private equity fund. From the beginning, the task has been defined to prepare the company for a successful sale. And it is the owner’s job to spot when the time is right for a sale. Once the time for sale approaches, it is also the owner that has the entire sales apparatus ready, and the board’s role in the actual execution of the sale is therefore often relatively limited.
In this type of company, the board’s role mostly evolves around the ownership period – to increase company value and to make the company robust in all dimensions. In short, the board is to prepare a ready-for-sale valuable asset for the private equity fund.
THE PUBLIC COMPANY
The public company is constantly traded – in small chunks. Here, the board’s role is naturally to ensure that the asset’s value is continuously increased (as in the other ownership forms) and to ensure full transparency in the company, thus enabling investors to make their decisions on a fully informed basis.
The special role (and responsibility) of the board comes into play when the company is:
– To go public (IPO)
– To receive an offer from a controlling ownership holding (often with right of redemption/duty for all shareholders)
In these situations, a lot of strategic, financial and business considerations and decisions lie with the board, including:
– Purpose of change in ownership form, including financing of the company that the ownership may give rise to (the company’s interests)
– Valuation of the company, and whether this can be recommended to the shareholders
– Whether the company is ready for the requirements caused by a new form of ownership (e.g. with an IPO)
– Costs of the ownership form (both initial and current), including the time spent by the executive team
ROLES IN THE VARIOUS PHASES OF AN OWNERSHIP CHANGE
Not just the ownership form but also the various phases up to an ownership change will have significant influence on the role that the board of directors should ideally take. Let us review them:
Certain parts of the company’s objectives and strategy will be independent from any later considerations of a company sale. But there will often be elements that should certainly be influenced by a potential end game concerning a sale. It is therefore absolutely critical that the owners, board and executive team are aligned on any desires concerning a potential later sale, timing and buyers.
This alignment may influence any ongoing decisions made in the company on investments (including timing), market choices, risk profile and methods of remuneration, etc. At the end of the day, it is a matter of asking yourself “would this decision add value to a potential buyer?” when making decisions.
SELLER DUE DILIGENCE – A PART OF THE SALES PROCESS
It may be a very good idea to execute a seller due diligence 6-12 months prior to a sale. A seller due diligence will not only provide the board and executive team with an objective and independent decision-making basis but will often also result in identification of issues that could with benefit be dealt with prior to an acquisition due diligence, partly to increase asset value, partly to avoid unpleasant surprises during the acquisition process. The seller due diligence may contain a strategic/market identification, but it should also contain an operational component that determines the company’s scalability, robustness, risk profile and any further potential improvement areas for the new owners.
The board should support the executive team both before and during the sales process, in terms of both competences and resources. The help can relate to all elements of the process (choice of advisors, preparation of IM, management presentations, etc.). The board should be especially aware that it is incredibly important that the company continues to deliver the forecasted financial results in the sales process (which often turns out to be a problem, not least because the executive team spends so much time on the sales process).
The board should therefore expect to spend an extraordinary amount of time in the sales situation and should agree on the ground rules, both among themselves and with the executive team.
TRANSITION TO A NEW, EFFICIENT OWNERSHIP
Finally, the board should prepare the transition into the new ownership. It may be beneficial to discuss how the new owners should be introduced to the business, how any new board members should be introduced, and which new, strategic initiatives should be discussed quickly.
And of course, the loop begins all over in identifying which role the board should optimally have with respect to the new owners and their objective with the company. The only thing that will never change is that the board’s role is never static.
Originally published in Board Perspective.