Human Capital Risk and the Impact on Business Value
A stable, skilled, quality workforce is one of the top value drivers that contributes to the purchase price of a business.
When a business for sale is being evaluated by a prospective buyer as a possible candidate for purchase, the quality of the human element will be considered. The staff is a major component and the backbone of any successful business operation.
Any aspect that reduces risk in the continuity of the business under new ownership adds value. A stable, skilled, quality workforce is one of the top value drivers that contributes to the purchase price of a business for sale.
It is important, therefore, that you, as the business owner, keep your key employees: they are your business. Buyers look for situations where management and/or key employees want to stay for the long term. The quality of the workforce, including experience, expertise and depth of knowledge will be considered. An in-place team that can provide continuity and assist in the growth of the business under new ownership is a valuable asset. If a company’s success is reliant on capable, well-trained employees — not the owner — it means the business will not be negatively impacted under new ownership.
Reducing the Human Capital Risk
Human capital refers to the stock of competences, knowledge and personality attributes embodied in the workforce that has the ability to produce economic value. A workforce that can lead to increased production, innovation and good word of mouth advertising is more valuable and less risky than one with lack of job performance and employee turnover that would result in missed business opportunities and increased costs.
In analyzing risk, as far as labor is concerned, the following are key areas that may be considered:
- The availability of a qualified labor pool. Are potential employees hard to find or is the labor pool adequate for the skills required if employees need to be replaced or added?
- Are key employees and management due a significant salary increase?
- What are the ages of the employees and key management? If many of the key managers are close to retirement age, they may just retire when ownership changes.
- What is the liability risk with the employees? Have the employees been trained sufficiently in safety procedures? Is safety an ongoing program for the employees? If the company has delivery vehicles, a check of accident history would be in order.
- Will key employees stay once the company changes ownership?
- Has management been efficient? Are they up to the challenges of the future? Do they have the education or expertise to take the company to the next level?
- How many of the key managers are relatives? If all or most of the key managers are relatives and will be gone after the company sells, there is no management.
- Who is responsible for the majority of sales? Does the company have a sales force or is the owner responsible for most of the sales and, if so, how hard would it be to replace the owner?
Use the above as a checklist to help you assess the human capital risk in your business. Find ways in which each area can be improved to reduce transitional risk for a new buyer. A business owners' efforts to build a stable, skilled, quality workforce will payoff with an increased purchase price of the business.
Learn more about the Ten Value Drivers that Increase Sale Price of a Business.