Business Value Drivers: Owner Dependent Businesses
There are a dozen or so ways to create highly valuable businesses, but one business value driver stands out to me like no other.
As someone that has been on all sides of the transaction as a business buyer, seller, and as advisor I believe if I had to choose one main reason many sellers don’t sell their businesses or leave a lot of money on the table in a business exit is that their business is simply too owner dependent.
They are the business!
Does this sound familiar to you?
This is really seen with businesses with under a few million in annual sales.
It is counterintuitive for many owners to think of hiring others to do their job. Many miss the big picture by believing it will erode their profits. After all they pride themselves as being a “mean and lean machine”. And then there’s the thought that says, “if I want it done right, I might as well do it myself”. It will be done your way but it’s those fresh sets of eyes from employees and outside consultants can be extremely helpful in scaling a business. Remember, we all only have so much bandwidth- energy, types of intelligence, gifts, strengths, and talents.
These business owners are often exhausted, and things typically slip through the cracks as they try to scale their business. They own a business that is running them instead of vice-versa. When you break it down, really, what kind of lifestyle is this?
I see businesses of all types of businesses that are owner dependent and few of these owners can hand a business over to a new owner that doesn’t have the industry experience to just pick up where they left off and easily make the transition to take the business to the next level.
Some make it by the grace of God, grit, determination, little to no vacation, and buying the business at a discount, yet others are not able to pull it off, and before long, simply tap out.
An owner needs to look at their company through the eyes of a buyer to position the company as a desirable target. Potential buyers that do not have the years of expertise and relationships will struggle to say the least to sustain the owner-dependent business- especially the first year of being in business. It is a recipe for disaster, and it doesn’t need to be this way.
By putting together a strong management team with ample cross-training in the business is integral to the business’s success and commanding maximum price in a business transaction. A strong management team is a foundation for hiring the best possible talent and putting processes and systems in place to increase company growth, customer satisfaction, efficiencies, profitability, and thus value.
Please do yourself and those around you a big favor and stop being the “chief cook and bottle-washer”. Also, look at yourself and everyone else in the organization and determine everyone’s “highest and best use”. For example, if they are worth $50 per hour, why are they doing a job that pays a fair market wage of $18 per hour?
Just as businesses can be owner dependent, so can a business be overly dependent on certain customers and suppliers, but this is a discussion for another day as we continue to discuss business value drivers in our next blog.