Over the years, many business owners have asked me, “How much is my business worth, should I decide to sell it?”
One truth I consistently share with business owners is this: The more personally involved you are in the day-to-day success of your business, the less it is worth to someone else. This can initially be confusing to an owner; however, you can gain more value by making your business as turnkey as possible for a future owner. Why? Because buyers are buying a business, not an individual.
Owner dependency increases the risk of the company failing when the owner is removed after a sale. This dependency reduces the valuation due to an increase in perceived risk. Why? The business will be more complex to operate successfully without the original owner overseeing all the operational details. The buyer will lose confidence in a smooth transition because the company’s value is not easily transferable when it depends on an individual owner.
Here are four ways to identify if dependency on an owner in day-to-day operations and activities may adversely impact the sale price when it’s time to sell the company.
Owners who are constantly fighting day-to-day fires lose sight of strategic goals.
Buyers are looking for growth potential. By using a structured growth plan with strategic goals for product/service positioning and innovation, buyers tend to be more willing to pay a premium when evaluating a purchase price. Conversely, they will discount their offer if these strategic growth goals and objectives are not well documented. Without a strategic plan that supports growth goals and objectives, a business will not become a leader in their industry and will likely fall back into a stagnant or passive position.
Businesses with high levels of owner dependency often lack standardized, documented procedures.
Buyers are looking for documented standard operating procedures to ensure that remaining staff members know how to perform their jobs successfully and to guide the training of new employees once the previous owner is removed from the picture.
Owners who “do everything” provide cover for undertrained or weak management teams.
Buyers are extremely reliant on the existing management team to provide continuity in the immediate days after the transaction. Any disruption in service or production can have an exaggerated negative impact on the business’s performance or reputation during this crucial time. Employees and customers are carefully evaluating new ownership and have placed them under the proverbial microscope.
Owners who act as the primary salesman are putting subsequent growth prospects at risk.
Buyers are purchasing the future performance of the business. There is an expectation that the company has sufficient structure in its business development and sales management to ensure that replacing any one individual will not cripple these efforts. A business that retains the resources needed to continue revenue and customer base growth after a sale is much more attractive to potential buyers.
Are you ready to learn more about how to reduce owner dependency?
Please reach out to us to schedule a conversation, but also take advantage of listening to this episode of the Power Exit Podcast with John Marsh as I lay out the hard truths about financial blind spots, owner dependency, and why most business owners wait far too long to prepare for an exit. Click now for the podcast.
Connect with Steve: (404) 931-4430 | /in/steven-fisher-cfo | Schedule a Call
