Business owners have often committed a significant portion of their lives to building their businesses. They devote every spare moment to perfecting their operations and managing their employees. While laudable, these efforts can also backfire. A business that can’t operate without its owner is one that is more vulnerable to failure when it sells.
This phenomenon, known as high owner dependence, can affect the number of quality buyers interested in the sale. Those who aren’t scared off by an owner dependent business may propose less favorable terms. That’s why owners need to run their businesses like they will inevitably be sold.
Some questions that can guide the process include:
- Have you built a management team? Make sure that your managers are fully prepared to run the business without you. Nearly every business needs a marketing director, VP of sales, and a director of operations. This team can positively impact your business, and maybe even drive up its value in the eyes of potential buyers.
- Have you appropriately delegated authority? Micromanagement kills businesses. It’s not enough to have a good team in place. You need to use them! Delegate authority where possible, and benefit from the expertise you’re using your hard-won earnings to fund.
- Are you sure your business can run without you? Even businesses with amazing reputations and impressive growth trajectories are sometimes excessively reliant on their owners. Some questions to ask yourself that can help you assess whether your business is overly dependent upon your guidance include:
- Are you always involved, or necessarily involved, in the sales or management of large accounts?
- Do you ask your team to check in daily?
- Do you require your team to consult you before making big decisions in their area of expertise?
- Do you have clear and well-documented processes and policies? Or are they in your mind—or the minds of a few key players?
- Are you the primary driver of product development?
It’s important to also consider your finances. A business that is too dependent on its owner may also have sloppy books. Do you have an outside expertise managing your books? Or do you do it yourself or delegate it to family? Proper financial projections, financial knowledge, diligent record-keeping and clear metrics are vital to ownership transitions. They’re also good practice even when you’re not planning a sale.
So when should you think about helping your business function without you? The sooner, the better. If you anticipate a sale, two to three years is the minimum time frame you may need to prepare your business to operate without you. This gives you the time you need to recruit a skilled team, establish clear processes, and then observe how your business functions under those processes and with that team. This advanced preparation ensures that potential buyers see your business in the best possible light.
Working with an M&A Advisor can help you address common issues, particularly if you plan to transition your business from being completely under your thumb to being capable of operating without you. An M&A Advisor can also help you develop strategies for increasing value, potentially driving up the ultimate sale price of your business.