Leadership and risk are inseparable factors in a company’s marketability 

Key Takeaways: 
  • Leadership depth throughout an organization is a critical value driver in succession planning and M&A, reducing continuity risk beyond the C-suite.
  • Companies that invest in leadership development at every level convert personal goodwill into enterprise goodwill, increasing long-term marketability.
  • Strong distributed leadership helps mitigate operational, customer and transition risk, making ownership changes smoother and more sustainable. 


In a merger and acquisition (M&A) scenario, one of the key value drivers for the buyer is determining the quality and depth of leadership in the target company. But that doesn’t apply only to the C-suite.  

So what does “quality leadership” look like, and how is it embedded in a top-to-bottom company culture? Simply put, it’s a situation where ideally, a Company owner can walk into their company, and the employees say, “What are you doing here? We’ve got this.” 

For a potential buyer, an environment like that is like gold. It evinces a culture that values leadership training and employee empowerment at every level of a company. Equally as important, it mitigates the continuity risk of a company and their ability to consistently sustain its underlying operations, with or without the involvement of its owner. 

If your employees are saying, “We’ve got this, go to the golf course,” then it probably means you have leveraged everything perfectly and you’ve de-risked your own position. 

Why is that a key value driver in an M&A scenario? Because people are almost always the most valuable asset that any company brings to the table in a business transaction, and a company that trains, develops and empowers its employees has a workforce that is loyal and invested in helping the company succeed, even through a transition to new ownership. 

An organization that has enabled and encouraged leadership at every level and done it through training and culture has converted personal goodwill into enterprise goodwill. That is a company that is marketable. 

Leadership in the C-Suite 

In middle-market companies, CEO-owners often wear multiple hats. They are employees of their companies, but also shareholders. They may also fill other key roles. But their primary role is to provide broad leadership in the form of providing direction and holding their employees accountable to helping navigate a company towards the direction. All while nurturing a productive workplace culture and growing the company. 

When a business sale is on the horizon, potential buyers will look at every facet of C-suite leadership in assessing the health of the company.  

What does the CEO do on a day-to-day basis, and how critical is it to operations? Are you a true CEO overseeing operations? If you have well-trained people in the right seats and they are empowered to help the company build, leverage, scale and grow, then the operations are sound and the CEO’s role is primarily strategic, which is what a potential buyer wants to see, as it reduces C-suite risk. The CEO who makes all the personnel decisions, has an active hand in financial management and is an active operational decision maker is sitting on a house of cards.  

  • Does the CEO have a coherent strategic plan, and if so, are they executing on the plan?  
  • Does the CEO consistently network with top customers and play a key role in new business development?  
  • Does the CEO clearly communicate company values and ensure that the workplace culture is built around them? 
  • Does the culture encourage innovation and moderate risk-taking?  

In middle-market companies, the strategic position of the CEO lays the foundation for strong leadership. The margins for error are smaller than at large corporations, and the layers of bureaucracy fewer. So when mistakes are made or initiatives aren’t successful, course corrections can be made more quickly. 

When a potential buyer sees CEO-level leadership that supports innovation, that executes on a clear strategic plan, and that fosters open communication, the buyer knows that the company’s management and workforce are adaptable and capable of keeping the company firing on all pistons during a transition to new ownership. 

Potential buyers are motivated by many factors, but one of them is that they want to buy an existing company that is successful and that they don’t have to build. They want to take what the previous owner built and improve on it as they operate it. A loyal workforce that has benefited from strong leadership enables them to do that. 

Key Management Leadership 

A buyer may be concerned with continuity risk. Will they be able to run the company with continuity, without any shocks to the system, and thereby avoid workforce turnover and possible loss of customers? Business continuity risk may not show up in the financial statements in terms of revenues, profits and cash flow, but it is real. 

That’s where key management comes in. If the company is sold to an outside buyer, the key managers, including the CFO, COO and HR director, among others, play a key role in advising the new owner about any changes they may wish to make and carefully implementing those that are made. 

But there is also the possibility of key management risk. High-level key managers who have been with the company for many years may consider a sale to be their opportunity to take early retirement or pursue other professional opportunities.  

Key managers should be consulted individually by the selling CEO prior to going to market to assess their likelihood of leaving or staying with the company (Note: this should be done ONLY if the CEO isn’t concerned with any unexpected flight risk at the suggestion of selling. Loose lips kill deals!) Minimizing key management risk is important, as it must be disclosed to potential buyers, and for good reason. If that risk is not mitigated, it could cripple the company’s operations post-sale. 

In addition to the people in the key management seats, the nature of the business must be considered. Some companies and some industries have higher or lower levels of inherent risk when it comes to key management. 

Certain industries such as professional services and construction, engineering and architecture rely heavily on relationships, and the goal is to hire good people at the key management and middle management levels who will develop and maintain those customer and vendor relationships over time. You still have key management risk, but you can mitigate that by building a workplace culture around a retention model. 

Concentration and Complexity 

For the buyer, assessing key management risk in a potential acquisition may require looking at a broad range of data and extrapolating the facts. In many companies, determining risk is an exercise in understanding concentration and complexity. 

For example, a manufacturer may have a very concentrated customer base if its business is making and delivering components to major industries, such as airlines. If the manufacturer relies on three customers for its business, the relationships with those customers must be both broad and deep, meaning multiple members of key management must be involved with their counterparts at the customer company. 

The CEO, COO and vice president of sales for a parts manufacturer may have a relationship with the vice president of maintenance operations at the airline. The COO and supply chain manager may have multiple relationships with the airline’s maintenance and repair department. These relationships are crucial to anticipating when major parts will be needed by the airline, how supply chain delays may be mitigated, what training may be needed to properly install and operate new components, and so on. These relationships are vital to maintaining a long-term relationship with a key customer. 

But if the manufacturer has only three major customers, which can be common in certain industries, these key management relationships become outsized in their importance.  

The potential buyer must look at risk based on what the company’s customer base looks like, what their product mix looks like and how deep and sustained the management relationships are.  

Key Management Buyout 

In the event that a group of key managers buys the company, most of the leadership roles are well known. But a CFO who now becomes a shareholder needs to transition to a new type of leadership role, as do the other new shareholders. The CFO should not expect to remain as the fulltime CFO as a new shareholder. While they may come to their leadership role with expertise in finance and accounting, they need to understand and provide leadership to the company as a whole. This will involve working with their colleagues, who may have come from sales or human resources, at a different level.  

That is part of their homework on becoming a new leader — understanding that they can no longer be the CFO or the COO 40 hours a week. They need to institutionalize their knowledge and expertise and create a new infrastructure for their role in the company. 

While M&A activity has heated up over the past decade and has become a common business event, management buyouts are often a way to ensure leadership consistency and effectiveness. The capital and the workforce are already in place, as is the institutional knowledge and the understanding of what is needed to take a company to the next level. 

Conclusion: Leadership and Risk 

Leadership and risk are inseparable as factors in the marketability of a company and its operations. Business continuity risks exist on a kind of hub and spoke relationship. You have financial risk, customer relationships, supply chains, market risks, technology and governance. These are the spokes. The hub is your people at all levels of the company. 

By creating a culture of leadership, training, knowledge and empowerment at all levels, a CEO can significantly de-risk a company and enhance its marketability when the time comes to sell. 

If you would like to discuss leadership development in your company, contact an Adams Brown advisor.