Exit Planning Tools for Business Owners

owner centricity

Is your business too dependent on you?

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By definition, a small business depends on you, its owner. Especially if you are its original founder. After all, the business would never have existed without the leap you took to start it in the first place. It wouldn’t have survived it’s early years without the sweat, tears and sacrifices, financial and otherwise, that were made.

Likely it survived and went on to flourish because of some special knowledge, skills or traits you either already had when you began, or that you developed while building it into the successful enterprise it has become. The value that you brought to the table in the beginning was your company’s most precious asset, and is likely still valuable today.

However, if your company is too dependent you, then it’s probably not operating as efficiently as it could. Put another way, If you are your company’s greatest asset, then you could also very well be its biggest liability. Owner dependence can be an obstacle for growth and hurt a company’s value when the time comes to sell.

Degrees of owner dependence

Owner dependence comes in many different forms. Does the business rely on you for most or all of its sales? Are you the go-to person for a key skill or necessary knowledge? Are you required to review others’ work and sign-off because you hold the required license? Are you still doing the bookkeeping or payroll?

Even if not involved in the daily operations, there are other ways a business could be owner-centric. Are you the only one who brings new ideas for growth? What business decisions are you responsible for? In what areas does your management team need your approval before taking action?

There are various surveys available which can help identify how owner-centric a business is; we offer one that takes less than 15 minutes to complete. Here’s another way to get a basic idea of owner-centricity that takes only a few seconds. How much time did you spend ‘touching base’ with your company during your last vacation? If you’re not sure, I’ll bet your spouse knows.

Too much dependence = less value

A business too dependent on its owner can make it more difficult to sell and even reduce its value. If a potential external or internal buyer (if you plan on selling to key employees) can’t fill your shoes, then they must either hire talent to replace the lost skillset, or keep you on for an extended time to help with the transition. Adding headcount means less profit and therefore less value. An extended transition means more risk to the buyer, (what if the business can’t be as successful without you) which again makes it less valuable.

Even if you don’t plan on selling any time soon, getting the business less dependent on you can provide value in other ways. How much would it be worth to you if you could spend 10 less hours a week at work? What would it mean to those you cared about if you had more time to spend with them? How would it feel if you could take 3 months off comfortably knowing that your company is humming along fine without you?

Some owners who have had this concept presented to them have reasons why they can’t take their fingerprints off the business. The most common ones are, “I’d love for the business to be less dependent on me, but I’m too busy to train someone else.” Or, “I’m involved in these areas because a mistake would be too expensive.” There’s also the classic “No one can do this as well as me!” These or other reasons could be challenges for you as well. I didn’t say this would be easy. On the other hand, owners that have been able to overcome these obstacles have created more business value and a better quality of life for themselves. And some who initially thought they wanted to sell had a change of heart. Once they found that the business wasn’t running them, ownership became enjoyable again and it was worth keeping.

Taking the first step

If this sounds like a worthwhile exercise, the first step is to identify the aspects of your business that are dependent on you. Then start small and pick one area to tackle first. Can it be delegated? Can it be systematized? Outsourced? Maybe some additional training is needed. Maybe someone with experience in that area should be hired.

Once you have the first one checked off, you should have more time and energy to tackle the next. It’s a virtuous cycle. Accomplish enough of these and not only will your company’s value increase, so will your quality of life.

Michael Jones, CFP, CEPA spent several years in management and engineering roles for various Fortune 500 companies. He has a B.S. degree in Mechanical Engineering from Virginia Tech and an MBA from the Krannert School at Purdue University. He is the President of Ataraxia Advisory Services, LLC.

Why You Can’t Sell Your Business Overnight

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So why can’t you just sell your business in a couple of months?

Business owners are often told they need to get ready to sell their business, why can’t they just up and sell it? The short answer is that they are unlikely to sell it. Listing the business may be easy, getting someone to buy it, that’s the hard part. According to the Exit Planning Institute, only some 20-30% of businesses sell today.

You might be asking yourself, what actually makes a business part of this group who does sell?

Of course, there may be many answers to this question, but I think the biggest reason can be summed up in a single word: Risk. A business buyer is going to look at several factors when determining if they will buy. These factors lead them to conclude a risk level and they compare that with their tolerance for accepting risk. The higher the perceived risk, often there is a direct correlation with a lower multiple of EBITDA, and thus a lower selling price. In some cases, the risk perception may be so high that the buyer decides there is no price they would pay to accept that risk.

What are some of these perceived risks?

I think for a lot of small and lower middle market businesses, the challenges for a successful sale to an outside party are greater than for larger companies. Larger companies are larger because they sell more products – they need more inputs to sell a larger amount of their product. They need people, processes and management. Usually in a larger organization, the owner is not participating directly in the production or sales of the product, they have an organization that does this. Contrast this image with a smaller company where the owner is directly involved in the production of the product or sales – the greater this involvement, the greater the perceived reliance on the owner. We call this “owner centricity.” The higher the owner centricity, the riskier the proposition is to an outside buyer.

If the current owner is deeply active in production, sales or the management of the firm, then an outside buyer will have to replace those functions – they may conclude they will have to do these activities, and there is the rub. They may or may not want to do them, but perhaps more important, they may not perceive that they are able to do those functions. An owner who knows all his customers, an owner who is a gregarious personality and is responsible for attracting new business, an owner who has been at it for decades and knows the industry, the suppliers, the competition – those are all critical owner functions – the problem is that a new owner may not be able to see themselves doing those activities with the same success as someone who has done it for years. If the prospective buyer can’t see themselves as being able to do these functions as well, then they will question whether the business can repeat the sales and profits earned by the original owner. The degree to which this idea is challenged is risk.

A way to reduce this risk might be to reduce the level of owner centricity. To reduce the level of owner centricity, an owner would assess the critical functions of the business and measure the extent of their involvement. Once measured, the owner would undertake the process of implementing a management succession plan to develop written procedures, systems and policies, and begin the methodical process of handing over or delegating the owner’s responsibilities.

I like to think of a business as a mental model that fits inside of a shoebox. The box has systems, policies and procedures, that runs itself. It produces a repeatable process of making money. Imagine that one could reach inside that box and pulls the owner out! Now the owner owns the box that produces the repeatable product and earns a predictable profit. I recently met with a business owner client who shared that he had taken our advice and told his staff that he is no longer coming into the office. (His words were “only call me if someone dies”!) What he found was that the business ran without him, it produced recurring and repeatable revenue and profit streams. A new buyer might perceive that they can own that box, and they may then perceive it as less risky.

Exit, succession and continuity planning is about this process. Reducing owner centricity is one thing an owner can do to prepare for a sale or exit. This is not a quick fix, this takes time. Those who develop and implement an exit and succession plan over time may be able to reduce the perceived risks to a new buyer. You might say, those with a plan have a better chance of selling their business than those without a plan.

Mark Hegstrom is Certified Exit Planning Advisor and helps business owners to plan for what may be their single largest lifetime transaction: the transfer of their business. Get started by completing an exit readiness Assessment for yourself. Mark is Managing Partner at Business Owner Succession Strategies (BOSS). He currently serves as President of the Exit Planning Institute -Twin Cities Chapter.