The employee effect
All business owners understand that good employees are vital to the success of their business. Quality employees take responsibility, build strong relationships with staff and suppliers and inspire other staff members to put in their best efforts at work.
Many business owners have also experienced the damage and havoc that can be caused by one or two rogue staff members.
Based on this, the quality and reliability of your employees will have a direct impact on the value of your business. At Quinn M & A, we normally break down our analysis of employee risk factors into two broad considerations:
- Roles and responsibilities, and;
- Risk of exit.
Analysis of these two factors normally provides ample information to assess the impact of employees on a business’ value.
1. Roles and responsibilities
What roles and responsibilities do individual employees have in the business? Further, What degree of cross training exists between different employees? This is especially important for employees who take on managerial responsibility or team leadership roles, and for employees with unique and important relationships with customers or suppliers.
In circumstances where there are employees who play a unique role within a company, with limited capabilities amongst other employees or in the broader job market to assume those responsibilities in an effective manner, a notable risk exists to the business’ future performance. Should the employee exit the business, key skills may be lost and customer or supplier relationships may be fractured. Accordingly, these risks will likely have a negative impact on the business’ value.
2. Risk of exit
What is the likelihood of employees exiting the business? Normally when assessing this we look at:
- Employee turnover data: That is, on average how long will an employee stay with your business, and what percentage of employees exit the business on an annual basis? These measures help us to assess the chances of employees leaving in the near future, as well as the likely number of employees to do so. If employee turnover is quite high compared to similar businesses, there may be a negative impact on the enterprise’s value.
- Age of employees: How many employees are approaching retirement age? What is known about individual employee’s plans for the future? If key employees are approaching retirement age, there may be a negative impact on the business’ value.
- Promotion and career advancement opportunities: What opportunities can the business offer to skilled and talented team members? What is the chance that capable and experienced employees will leave the company to further advance their career? This is a difficult factor to measure, however careful analysis of key management personnel is required in order to measure what risks may exist.
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Employees have the ability to generate significant value for an enterprise. Employees are human however, so careful consideration must be taken of the risks that could jeopardise the value that your team creates.
If you are seeking a professional advisor to assist you with the merger, acquisition, divestment or valuation of a business with an enterprise value of between $1 million and $50 million please contact Quinn M & A on 02 9223 9166 or email [email protected] to find our nearest office.