Developing a business that is less reliant on the owner is a key value driver for many businesses. Purchasers are very interested in assessing the extent to which sales will continue and the business will carry on under new ownership.
If sales are generated by the owner’s personal skills, abilities, contacts and relationships with the customers, the ability to transfer those clients to new owners will be extremely uncertain. Acquirers generally avoid businesses that are too heavily dependent on the owner for its success because the ability to generate future revenues is too risky.
Potential purchasers will assess the extent to which the owner is the main contact person for customers and suppliers when considering how much to offer for the company. The extent to which employees can operate independently of the owner’s presence will also be considered.
An experienced management team with sufficient depth and breadth and formalized roles and responsibilities and working together in line with the business plan is critical in order to reduce the company’s reliance on the owner.
A list of 5 warning signs that a business is too dependent on the owner along with some suggestions for beginning to enhance the value of the business is as follows:
- New business is not generated without the owner’s efforts – hire a salesperson or delegate sales responsibilities to key employees; link employees’ bonuses to the gross margin on sales they generate
- The owner is the main contact point for customers and knows all customers by first name - hire a salesperson or delegate some customer relations responsibilities to other employees; have a trusted employee shadow the owner when meeting customers so over time customers get used to dealing with someone else
- Employees contact the owner with various problems constantly – hire more experienced individuals that can be more self-sufficient; develop job descriptions for each position detailing each role’s authority, responsibility and accountability
- The owner closes up every night, signs all checks and cannot take extended breaks – develop an employee manual of basic procedures and job descriptions; give a trusted employee signing authority for checks up to a certain amount; take one day off to see how it impacts the business and work up to being able to take a few weeks off without it affecting the business
- Only the owner receives tickets from suppliers - appoint a trusted employee as the key contact for a major supplier and give that employee spending authority up to a certain amount
If you are building a business to sell one day and are curious to see the impact of owner reliance on value, take the 13 minute Sellability Score questionnaire: