5 ways to tell if you have an Owner Dependent Business.
What is the number one thing that scares off a prospective buyer from acquiring your business?
It’s the businesses’ reliance on the owner for the functioning of day to day operations.
The Problems Of An Owner Dependent Sale
As a business owner, there may be a little bit of ego in play. You built the business, missed countless family events, nights outs, birthday parties, etc… building this business. You’re the backbone. Who wouldn’t want to be the star of the show?
The person buying your business, that’s who.
Consider the proposition of selling a business that completely revolves around you: you want me to buy the business and then ‘fire’ it’s top employee?
Good luck to me trying to run things that revolved around a person that’s no longer around.
You may be reading this thinking “That’s not me”. But you’d be surprised how many small business owners have built an ‘unsellable’ business because the business is way too dependent upon them. Well, you may actually be this type of owner. How can you tell?
5 Signs You’re Running An Owner Dependent Business
1. You are the only signing authority
Most business owners give themselves final authority… all the time. After all, who wants to give up financial control of their baby, right? But what happens if you’re away for a couple of days and an important vendor needs to be paid? What happens if an emergency arises and payment is required for a solution? Consider giving an employee signing authority for an amount you’re comfortable with, and then change the mailing address on your bank statements so they are mailed to your home (not the office). That way, you can review everything coming out of your account and make sure the privilege isn’t being abused. Trust… but verify.
2. Your business isn’t growing
There is a limit to what one person can do. No matter who you are, eventually you will reach a ceiling of how much you can make. Consider narrowing your product and service line by eliminating technically complex offers that require your personal involvement, and instead focus on selling fewer things to more people.
3. You have a team of contractors
There are many benefits to having a team of contractors fulfill operations. But the biggest flaw is that none of them do anything without getting an order from you. Consider hiring someone to manage the contractors for you and you manage the manager. This way, you can focus on other things, like bringing in more business for the manager to manage.
4. You know ALL of your customers by their first name
It’s good to have the pulse of your market, but knowing every single customer by first name can be a sign that you’re relying too heavily on your personal relationships being the glue that holds your business together. From a buyer’s perspective, what happens when you leave the picture? Will they want to do business with someone else? Consider replacing yourself as a rainmaker by hiring a sales team, and as inefficient as it seems, have a trusted employee shadow you when you meet customers so over time your customers get used to dealing with someone else.
5. You get cc’d on more than five e-mails a day
Employees, customers, and suppliers constantly cc’ing you on e-mails can be a sign that they are looking for your tacit approval or that you have not made clear when you want to be involved in their work. Start by asking your employees to stop using the cc line in an e-mail; ask them to add you to the “to” line if you really must be made aware of something – and only if they need a specific action from you.
This is not to say that there is no value in these types of owner-managed companies, or that buyers do not exist for them. They do and these types of businesses sell every day. But the values and deal structures are not maximized for the owners.
To be frank, the sellers do not get the price or deal structure that they want largely due to items that are in their control. They have not done what they could have during their tenure to mitigate perceived risk!
The more you can do as an owner to mitigate risk with regard to the transfer of your business, the more valuable and marketable your company will be.
How Does Owner Dependence Affect The Price of a Business Sale?
Here are 3 ways to better understand how and why the sale process is affected negatively:
Price: Savvy experienced buyers will evaluate the potential effect of the absence of the owner or other key personnel. This absence will include an analysis of which future sales and relationships may or may not transfer. Based on these predictions, the buyer will apply this risk to the valuation model. Basically, they will adjust future earnings, or the earnings multiple applied downward, thus negatively affecting the price.
Marketability: If buyers are uncertain about the ability of a business to transfer ownership due to heavy owner dependency, then it will take them longer to properly evaluate the company in terms of the transition plan, fit, and valuation. Risk projections cannot be predicted. What may seem to be a negligible risk to one buyer will be an unmanageable risk to another. Also, many high-quality buyers will simply look past your owner dependent opportunity for one that does not present so many transferability questions.
Structure: The way that buyers compensate for risk is via deal structure. If a buyer is concerned about transferability, then they will most likely offer a lower price to make up for the perceived higher risk. For example, if buyer and seller agree on a valuation of $500,000, instead of a one-time cash payout, the buyer may offer $150,000 cash at closing, a $200,000 seller note at 5% and an earn-out of $150,000 based on future revenue. The buyer may do this as a way to share risk in entering a situation where the outcome is far from assured and to ensure that the owner will do all he or she can to make the transition run seamlessly.
“A business that can’t run without its owner is a business with a deadline.” – Guy Rigby (2012)
In summary, if you’re looking to sell your business, then you need to realize that there are detrimental effects of owner dependence – a business’ reliance on the owner for the functioning of day-to-day operations – on the valuation of small business, especially when the owner decides, or needs, to sell to an unrelated third party. If you recognize this now, you will be able to make adjustments and add significant value to the business before selling.