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The Risk of Owner Dependence and How to Reduce It

Selling

Most people don't like to dwell on it, but the truth is, nobody can run their business forever. Situations where the owner is "essential" or "integral" to the business (to which with their departure, the business could not remain operable) is a major driver of risk in the eyes of potential buyers. Regardless of how much training is given to the new owner, or how many customer contacts are transferred, the business can't be sold if the current owner is the business. This situation is very common in small scale service-based businesses where the owner is almost always the rainmaker. For example: small accounting practices, insurance agencies, medical practices, handyman services, etc.

You will need to remember that you are selling the company, not yourself. Prospective buyers are highly risk-averse creatures that are always in search of value that far outlasts the current owner’s tenure. Owner dependence (or dependence on any key person) can produce several issues in the ownership transition process. This can mean that sellers won’t get the price or the terms that they want during the transaction.

On the other hand, bringing a business to market that has a management team in place (that is willing to stay on post-closing) dramatically broadens the pool of prospective buyers. A lot of buyers have the financial ability to make the purchase, but don’t have the talent or an operator who can jump in full-time and take over the role of the ‘key person’. Having a strong supporting cast in place indicates to the buyer that the business will continue to be successful long after the seller is out of the picture.

Questions to Consider

Here are a couple of questions to test whether your business is owner dependent:

   1.  If I go on vacation, can the business run on its own?
   2.  If I get sick, can I focus on getting better rather than working?
   3.  If I quit today, would my team/organization continue to be successful and grow?
 

If you can’t answer “yes” to all three questions, the current state of your company could potentially be a tough sell. If you’re thinking about selling your business, here are a few suggestions to help mitigate the risk of owner dependence and increase the likelihood of a successful transaction.

Related: Setting Achievable Goals When Selling Your Business

Make Yourself Redundant

The best advice is to “make yourself redundant”. You need to demonstrate to buyers that your business can flourish without you so that when you exit, everything will continue to run smoothly.

In most cases, the buyer will eventually be able to find someone to execute mundane tasks and manage the books. However, they will want to make sure that there will be someone in the company (who will be staying) that can ensure continuity for key relationships.

If your ultimate plan is to sell, you will need to ensure that your business employs at least one other person with management-type capabilities and permissions. If you do not already have someone like this in place, it should be a priority for you ensure that you do moving forward. This means hiring the right people, working on their growth, delegating important decisions to them, and encouraging them when they make mistakes.

The key here is to realize that you must begin to work on the business instead of for the business. If you begin to delegate responsibilities and migrate towards the sideline, you will have much more time to spend on planning, strategizing and goal-setting. Many business owners never take this important step back and so they remain self-employed and end up doing menial work for the length of their career.

Plan Ahead

Naturally, the steps needed to make yourself redundant take time. In an ideal world, a business owner should have a rough plan for their exit outlined prior to getting into the business. This, however, very rarely is the case.

While each situation is unique, we’d still encourage business owners to at least begin thinking about their exit strategy and how they plan to prepare their business for an eventual sale well before they decide to go to market. Business owners generally underestimate the time it takes to train others to handle all the work they typically do. The more you think through, and prepare for, these problems in advance, the more likely you are to achieve the results you’re looking for.

Related: Top 4 Mistakes to Avoid When Selling Your Business

Document Key Information

Business processes should be well-documented, and not take place solely in your mind. If you step away from the business tomorrow, your team should know how to keep things running and have all the information that they would need to make informed decisions. Prospective buyers love when they see that all company processes are well-documented and understood by all. This makes the post-sale transfer easier for everyone.

Having all processes well-documented also brings a heightened sense of professionalism to the business that buyers will certainly recognize and appreciate. Not only does this show them that you are a serious seller, but it also shows that the company is a well-oiled machine that will continue to succeed, regardless of who is at the helm.

Related: Preparing a Business For Sale: What Buyers Want To See

In Summary

Having a strong understanding of your company’s dependence on you is an important factor when preparing to sell your business. This will help you plan for long term growth, as well as have an impact on the future sale of your business. Essentially, the more owner dependent the business, the less transferable it is likely to be. However, if you are able to recognize this dependency early on, you will be able to prepare yourself and create a plan to build a transferable business.