Eliminating Business’ Dependency on the Owner – The Importance of a Management Team
Posted on March 15, 2019
Written By: Ronen Shefer, BusinessExit.com
Ask yourself this question; If you decided to take six months off from the business – as opposed to the old “what happen if you get hit by a bus” question – can your business survive without you for an extended period of time? If your answer is Yes, congratulations! You have achieved something most business owners only dream about. If your answer is No however, you should consider implementing strategies to lessen the business dependency on you.
It is common knowledge among business exit professionals and business brokers that when a business can operate without the owner(s) it tends to be worth more to a potential buyer than a business which requires the owner’s day-to-day involvement to run properly. The reasons for that are simple:
- Business sustainability is Very Important – From a buyer’s point of view, a business must survive long past the current owners’ involvement, in order for them to have adequate time to receive proper return on investment and a business that can achieve that quickly is worth more.
- Additional Cash Flow – When buyers look to purchase a business, they will always try to estimate the free cash flow generated from the business each year. If the current owner stays post transaction, it reduces the amount of cash flow available to the buyer each year and therefore will ultimately drive the value down.
- More Potential Buyers – A business that can run independently of the owner tends to attract additional buyers because these type of opportunities will attract financial investors with no ties to the industry or necessary experience because neither might be necessary to receive a return on investment. Just like any other transaction, more potential buyers can drive the purchase price upward.
- A Sign of Good Management Team – A business which does not depend on the owner(s) for operations or revenue is a great sign that a good management team exist and systems are in place to run the business. Strategic buyers, those who are looking to buy a business to grow their own, tend to value management team capability very high and will pay a premium for a business that can run effectively without an owner.
It is also important to mention that when your business can run without you, it will open the final, and at times more lucrative, exit option for you… owning the business as an investor but not being there day to day to run the business. I call it the ‘graduate level’ of business ownership but unfortunately most business owners do not see this as a possible outcome for them. The bottom line however, is once you reach the ‘graduate level’, all exit options become available to you because as we all know it… The best time to sell a business, is when you don’t need to!
So you are probably saying to yourself right now;
“Great, you convinced me that my business can be worth more,
if it is not dependent on me…but how do I do it?”
First, I should warn you… The action items might be simple to understand, but are difficult to implement. More often, it’s because of your potential inability to accept people doing things as well as you can do them, your desire to control everything, or simply the difficulty of finding qualified people. Either way, I’m hoping that by giving you the reasons why you should consider disengaging from the business above, you will decide to implement some of the most common strategies below:
- Make A List – Take the time to draft a list of all the tasks you preform for the business, the ones that only you can do, and why. This exercise should give you a good snapshot of the current state of affairs, and the items that .you will need to delegate over time in order to reduce the business dependency on you. This may also help you understand why the business is not growing. Perhaps it may be limited by your available time and/or lack of help.
- Begin to Delegate Responsibilities – Assuming you have a management team in place or several key people, begin delegating some of the tasks you listed above. You may want to start with the administrative tasks which are the biggest drain on your time, and then continue to take on one task at a time in order develop someone else who can perform it.Even if you have a management team in place, this process may take 2-3 years. But if you don’t have anyone to delegate these responsibilities to, it might be time to hire someone that at the very least will take the $10/hr functions from you so you can focus on the more critical tasks for the business.
- Accounting Personnel – Finances or bookkeeping is a sensitive area to most business owners but a good internal accountant or bookkeeper will be ‘worth their weight in gold’, particularly when you looking to disengage from the business. Getting someone reliable to provide reports and analysis not to mention keep the books in order, may go a long way to free your time and give you a piece of mind.
- Management Reporting Systems – The key to a good delegation process is your ability to receive reports from your management team on a regular basis in order for you to know exactly what is going on with the business without being there. You should consider developing Key Performance Indicators (KPI) or Critical Success Factors (CSF) which will allow you at a glance to know how your management team is performing even from 5000 miles away.
- Initiate Strategic Planning Processes – It will be tough for others to run the company for you without a clear direction and plan. This is precisely why we recommend that business owners initiate a strategic processes with their key personnel to ultimately develop the business direction, strategies to get there, milestones to reach and budget to monitor progress.
- Tie Employee’s Compensation to Achieving Goals – It is more common in today’s environment to tie about 15% of employees’ compensation to achieving company’s goals (strategic, operations, or sales related). Consider making a clear connection between the company’s performance and individuals’ pay rate and by doing so you are giving your team members the incentive to continue ‘minding the store’ when you are not around.
- Develop Your Management Team – Even if you have a management team in place (managers, directors, vice presidents, etc.) you need to continue developing them. You should train them to do more, give them the freedom to make decisions (even bad ones), and more importantly teach them how to build high preforming teams and discover emerging leaders. These emerging leaders will provide the next growth opportunity for you company and over time will become more important to the business than you or your key mangers.
- Take a Vacation – One way to find out how the business operates without you is by taking a vacation from time to time. Over the last 20 years, I witnessed several businesses actually operating better when the owner was away on vacation, and this might be the case in your business as well. Regardless, taking a vacation or time off from the business, will not only train the team to work without you, but also allow you the time necessary to think about the next phases for the business instead of working in it.
Whether you are planning on exiting your business or not, eliminating the business dependency on you is the right way to build the business hands down. It will not only provide for a better platform for growth, but it will allow you the quality of life most business owners dream of.
As mentioned previously, these tasks will take time, and require work from you and your key managers. Therefore, you can’t wait to the last minute, or the last year, before exiting your business to implement them. I would recommend beginning at least five years before your planned business exit date in order to give yourself a better chance to prepare your business, increase its’ value, as well as removing the option of selling the business, as the only way to fund your retirement.