Many small businesses are built on the effort and judgment of their owners. That is to their credit, but when the owner remains the element holding the company together, growth becomes harder and a sale becomes more difficult. Buyers treat owner dependence as a risk, and they price it accordingly.
What owner dependence looks like
An owner-dependent business does not operate well, or at all, without the owner’s direct involvement. The dependence usually takes one or more of the following forms:
- Customer dependence. Customers buy because of their relationship with the owner, and some may leave when the owner does.
- Process dependence. Critical tasks, from estimating to key supplier negotiations, can be performed only by the owner.
- Decision dependence. Routine management decisions cannot be made without the owner.
The cost of being indispensable
Few owners set out to build a company that cannot function without them. The pattern usually develops from a reasonable wish to control quality and service. Over time, however, it constrains the business in several ways:
- Employees. Capable people who are given no ownership of outcomes tend to leave, which raises turnover and recruiting costs.
- Growth. When every decision passes through one person, the company grows only as far as that person’s time allows.
- The owner. An owner who cannot take time away without remaining on call is at real risk of burnout.
- Value and structure. Buyers discount a business that may lose customers or capability when the owner departs, and they often shift more of the price into an earnout or a longer transition period to protect themselves.
A confidential valuation
A valuation establishes what the business would likely command today and identifies the factors that could improve its value before it goes to market.
Reducing owner dependence
Succession planning is the most effective remedy. The objective is to make the owner unnecessary to day-to-day operations well before a sale. Practical steps include:
- Developing a management team and delegating real authority to it, including coverage of the owner’s responsibilities during absences.
- Documenting the processes the owner currently performs, so that others can carry them out to the same standard.
- Transferring customer relationships to sales and service staff, so that customers’ loyalty rests with the company rather than with one individual.
An owner-independent business is easier to manage, easier to grow and more valuable to a buyer, and the work is best begun several years before a sale is contemplated.
To discuss the sale of your business, contact Twelve31 Advisors at 402-957-1231 or info@twelve31.com.
