By Dave Driscoll
How do you build business value and create the business that everyone wants to buy? As promised, I will highlight one tip each for three months. These strategies certainly help owners who are preparing their businesses for sale, AND also help strengthen EVERY company at any phase of the business cycle.
Tip 1: Make sure your business is not owner dependent.
Are you personally involved in daily decisions about routine business matters? Are you responsible for key customer relationships? Are your vacations repeatedly interrupted by employees seeking your input?
If you answer yes to any of those questions, you need to shift this dynamic immediately. Owners should be focused on long-term strategy, analyzing trends, maximizing business value…and developing leadership within a responsible workforce. Key employees should have the skills, knowledge, and authority to run daily operations without you.
Why is this so important?
Ramifications of an owner-dependent business:
- Employees are not independent thinkers or problem solvers. Instead of suggesting relevant improvements or feeling invested in the company’s success, employees keep their heads down and just go through the motions.
- Client & vendor relationships are tied to the owner. When the owner eventually exits the business, those relationships are jeopardized.
- The organization may be on an emotional roller coaster based on the owner’s mood. Businesses operate best when employees are aware of the big-picture strategy and collaborative goals.
- The ego/identity of the owner is wrapped up in the business. This is dangerous for both the owner and the business. Owners who have hobbies and outside interests are most satisfied. A healthy objectivity about the business provides valuable perspective for decisions.
When I was in the envelope industry, I met a fellow owner who was so controlling that he personally signed off on each and every press proof. Rather than empowering his employees, he conveyed that they could not be trusted with even the most basic tasks. If you truly cannot rely on your employees to reasonably perform their jobs, they haven’t been chosen and trained properly. Employees who know that you value their work and input will be more committed, more productive team members.
Value Risk: High
Businesses who cannot pass the “hit by a bus” scenario, have very little true value. At some point, every business owner will exit, one way or another. For a business to survive that transition, it cannot be dependent on one individual (or partnership).
Banks recognize this risk and are hesitant to lend to owner-dependent companies that want to expand. Prospective buyers will quickly realize the business isn’t worth much if the most valuable asset will be walking out the door post-sale.
Any characteristic that makes the risk of acquiring your business high is also detrimental to current value and profitability. Successful businesses are built on repeatability of process and incremental improvements. When eventually selling the business, a buyer needs to be confident they can continue (and grow) the business’ success. If the current owner is presented as the reason behind every achievement, the buyer will question whether they can smoothly step in and fill those shoes. Certainly, the owner is ultimately responsible for building a successful business and that is to be respected, but the ongoing operations and performance should not be contingent on the owner.
Solutions:
So, what if an objective look at your company reveals that it is owner-dependent?
First, put aside any ego and acknowledge that you should be the least important person in the organization. Then, take solid steps to make that a reality.
Develop a second, third, and fourth in command who are well-trained, committed to the business’ strategic vision and growth, and capable of leading. The time you invest in developing these leaders will exponentially increase business value.
This is key: you must truly delegate responsibility and AUTHORITY! Empower your managers to make decisions without running everything past you. Focus on results rather than micromanaging or second-guessing their processes. Then stand behind your managers and signal that support to the rest of your employees – support in public, counsel in private.
Take a vacation! The best test for how owner-dependent your business is or isn’t is to make yourself unavailable. Your employees should only need to contact you in case of an actual emergency. Smooth operations will increase everyone’s confidence; problems will point out opportunities to strengthen the company structure. A business that can run for extended periods without owner input is valuable!
Encourage all employees to suggest efficiency and effectiveness improvements. Recognize that they have a better knowledge of how things really work and value their ideas accordingly. In addition to improving the company’s bottom line, eventually, this will also help the transition to a new owner – employees who know they are valuable have less fear during a transition.
Regardless of your timeline to exit your business, viewing your company honestly from the perspective of a buyer will boost business value.
Dave Driscoll is president of Metro Business Advisors, a mergers & acquisitions, valuation and exit/succession planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at [email protected] or
(314) 303-5600. www.MetroBusinessAdvisors.com
As seen in Dave’s column in St. Louis Small Business Monthly
