Why is this such a critical topic? Because if your business is dependent on you, the owner, it can be essentially worthless. That’s a hard pill to swallow but a universal truth, with some minor exceptions. You see, all of your blood, sweat and tears getting the business to the stage that you’d like to sell is built on the back of one thing – you. Not all the time, but often enough with some serious heartbreak when you find out that your business is not sellable.
You might of course be thinking that there has to be a price a buyer is willing to pay for an owner dependent business. Of course, you’re right, but it comes with a different price. Most buyers are savvy business owners or serious merger and acquisition or private equity executives with decades of experience buying and selling businesses. They’re also well-schooled in the art of negotiation, and they’ll use the tactics they’ve learned to fire sale your business or make sure the owner is either tied to the business after the sale, or receives a lower amount than they should.
So, what do you do? The first thing to overcome this is to restructure your business into a built to sell enterprise that is not dependent on you. You have to build a business that has the resources, capabilities and systems that can not only survive without them but thrive after the transition to a new owner. This is easier said than done, because business owners love what they do, and they love their companies. They’ve spent years building relationships with their customers, and they’re usually the best when it comes to understanding the products and services the business provides and how to sell them. Reducing owner dependency requires focus, diligence and perseverance.
So, let’s get started. Here are ten ways you as the owner of your business can avoid owner dependency:
Create a Management Team
The first question is simple – “Do you have a management team?” That goes without saying, but not every business does. So, step 1 is to build a leadership/management team that can run the business for up to several months without the owner’s involvement. This is vital – ask yourself this question: “If you went on vacation for 3 months, how would your business perform without you?” It reveals a lot.
Once you have your management team, prudently over time, it’s time to gradually, over time, increase their decision-making authority to make strategic and operational decisions.
Set Management Meetings
Set up management team meetings according to a set, published schedule. It’s critical that these daily, weekly and monthly meetings are attended and set in stone, even when the owner is absent. Document the meeting minutes and key decisions that were made.
Write Job Descriptions
Ensure that the management team members and all job roles have current, written job descriptions. Make sure that you have an organizational chart that reflects the current business model and a 3-year future organizational chart that provides you with a hiring roadmap. Benchmark job performance against the job descriptions with clearly defined goals and objectives.
Write a Business Plan
This is your game plan for the company, and Owners and their management team should collaborate to create a written, compelling, “challenging but attainable” business growth plan that looks out at least three years. At a minimum, the first two projected growth plans should be on a monthly basis, with year three annually. The management team should review and report on performance against the plan at the very least quarterly.
Build and Cultivate a Winning Sales Team
You can’t reduce owner dependency when the owner knows all his or her customers by name, and the customers ask for the owner when issues come up. Begin building a sales team with sales processes from lead development through to sales close and transition to delivery, if applicable. Make sure that you’ve also built a sales pipeline management process using a customer relationship management (“CRM”) tool.
Delegate Owner Duties
All of the owner’s duties should be reduced to non-essential activities that can be done by other team members, and make sure that you cross-train employees on what the owner does. A critical step for sure to prove to a buyer that the business is not dependent on the owner and that the business can thrive without the owner.
Brief the Leaders on the Owner’s Exit Plans
Many business owners are nervous about letting their team know about their plans to sell their business. They believe their key employees will leave because they’ll be afraid that they’ll lose their job. It’s important to show your trust in your leadership team by bringing the in the fold with confidence. In turn, owners must create a win-win scenario for their top leaders, making sure the owner’s exit does not harm them. This can be accomplished using compensation plans and stay bonuses for the top leaders, such as phantom stock plans, and by making sure the top leaders are highly accomplished employees likely to be retained by a new owner if sale occurs. The owner can also make this a negotiation point during the sales process.
Eliminate Customer Reliance Issues
If you’ve not already done so, Owners should make sure they never meet with customers alone. Other team members should always be present and should own the customer accounts. This does not mean that you as the owner never meet with your customers. It’s ensuring that your customers understand who to go to purchase new products and services or to handle customer conversations and complaints. And handle customer conversations and issues as much as possible.
Eliminate Owner Involvement in Other Key Relationships
Your business interacts with a variety of key stakeholders, including suppliers, strategic partners, Other important external relationships, such as suppliers, lenders, strategic partners, attorneys, lenders, accountants and more. To continue reducing owner dependency, the management team and other key employees should conduct as much business as possible without the owner directly involved.
When owners successfully reduce the business’s dependency on them, the result may ironically be a business they will not want to sell because the day-to-day business requirements to run the business can be performed without them. When they’ve gotten to that point, they’ve reached a monumental milestone and increased the value of their business immensely, regardless of whether or not they want to sell. Hence why it is vital to begin “exit planning” years in advance to prepare for an eventual business sale.
Thanks Paul, we appreciate it. I can’t tell you how many times our client’s business value is affected by one or more of these strategies absent in their business. We’d love to connect when you have a moment. Give us a ring!