Increase Value with Skilled Management Teams
Ask yourself this question: If you decide to take six months off from the business, can your business survive without you for an extended period of time? Because owner dependence is definitely a thing.
If your answer is “Yes,” congratulations! You have achieved something most business owners only dream about. If your answer is “No,” you should consider implementing strategies to lessen the business dependency on you and strengthen your management teams.
Why Capable Management Teams Increase Business Valuation
It is common knowledge among business exit professionals and business brokers that when a business can operate without the owner(s), it tends to be worth more to a potential buyer than a business that requires the owner’s day-to-day involvement to run properly. The reasons for that are simple:
- Business Sustainability is Very Important—From a buyer’s point of view, a business must survive long past the current owner’s involvement in order for her to have adequate time to receive proper return on investment. A business that can achieve that quickly is worth more.
- Additional Cash Flow—When buyers look to purchase a business, they will always try to estimate the free cash flow generated from the business each year. If the current owner is required to stay post transaction, it reduces the amount of cash flow available to the buyer each year, and therefore will ultimately drive the value of the business down.
- More Potential Buyers—A business that can run independently of the owner tends to attract additional buyers, because these types of opportunities will attract financial investors with no ties to the industry or industry experience. Neither will be necessary to receive positive ROI.. Just like any other transaction, more potential buyers can drive the purchase price upward.
- A Sign of Good Management Team—A business that is not depended on the owner(s) for operations or revenue is a great sign that a good management team exists and systems are in place to run the business. Strategic buyers, those who are looking to buy a business to grow their own, tend to value management team capability and will pay a premium for a business that can run effectively without an owner.
It is also important to mention that when your business can run without you, it will open the final, and at times more lucrative, exit option for you, which is owning the business as an investor but not having to run daily operations. This is called the “graduate level” of business ownership, but unfortunately most business owners do not see this as a possible outcome for them. The bottom line is this: once you reach the graduate level, all exit options become available to you. Because, as we all know, the best time to sell a business is when you don’t need to.
Strategies to Eliminate Owner Dependence
So you are probably saying to yourself right now, Great, you convinced me that my business can be worth more if it is not dependent on me…but how do I do it?
First, as a warning, the action items discussed below might be simple to understand, but they are difficult to implement. More often, it’s because of your potential inability to accept people doing things as well as you can do them, your desire to control everything, or simply the difficulty of finding qualified people.
Either way, by giving you the reasons why you should consider disengaging from the business above, you will decide to implement some of the most common strategies below:
- Make A List—Take the time to draft a list of all the tasks you perform for the business, the ones that only you can do, and why. This exercise should give you a good snapshot of the current state of affairs and the items that you will need to delegate over time in eliminate owner dependence. This may also help you understand why the business is not growing. Perhaps it may be limited by your available time and/or lack of help.
- Begin to Delegate Responsibilities—Assuming you have a management team in place, or at least several key people, begin delegating some of the tasks you listed above. You may want to start with the administrative tasks, which are the biggest drain on your time, and then continue to take on one task at a time in order to develop someone else who can perform it. Even if you have a management team in place, this process may take two to three years. But if you don’t have anyone to delegate these responsibilities to, it might be time to hire someone that at the very least will take the $10/hr functions away from you, so you can focus on the more critical tasks for the business.
- Accounting Personnel—Finances or bookkeeping is a sensitive area to most business owners, but a good internal accountant or bookkeeper will be worth their weight in gold, particularly when you’re looking to disengage from the business. Getting someone reliable to provide reports and analysis—not to mention keep the books in order—may go a long way to free your time. Also, consider training key personnel and moving your financial functions to a cloud-based system to help prepare for transition.
- Management Reporting Systems—The key to a good delegation process is your ability to receive reports from your management team on a regular basis. Receiving regular reports clues you in to exactly what is going on with the business, especially if you’re not there. You should consider developing Key Performance Indicators (KPI) or Critical Success Factors (CSF), which will allow you to see, at a glance, how your management team is performing while you’re 5,000 miles away.
- Initiate Strategic Planning Processes—It will be tough for others to run the company for you without clear direction and a concrete plan. In order to monitor progress, business owners should initiate a strategic process with their key personnel to ultimately develop the company’s direction, strategies, milestones and budget.
- Tie Employee’s Compensation to Achieving Goals—It is more common in today’s environment to tie about 15% of employees’ compensation to achieving a company’s goals (strategic, operations, or sales related). Consider making a clear connection between the company’s performance and individuals’ pay rate.By doing so, you give your team members the incentive to continue “minding the store” when you are not around.
- Develop Your Management Team—Even if you have a management team in place (managers, directors, vice presidents, etc.) you need to continue developing them. You should train them to do more, give them the freedom to make decisions (even bad ones), and more importantly, teach them how to build high-performing teams and discover emerging leaders. These emerging leaders will provide the next growth opportunity for your company, and over time, they will become more important to the business than you or your key managers.
- Take a Vacation—One way to find out how the business operates without you is by taking a vacation from time to time. You can evaluate how well the business runs without your day-to-day presence. Also, taking a vacation or time off from the business will not only train the team to work without you, but it will allow you the time necessary to think about the next phases for the business.
Whether you are planning on exiting your business or not, eliminating the business dependency on you is the right way to build the business, hands down. It will not only provide for a better platform for growth, but it will allow you the quality of life most business owners dream of.
Rome was not built in a day. Building a more skilled management team to hold down the fort will take time and require work from you and your key managers. Therefore, you cannot afford to wait until the last minute, or the last year, to implement these strategies. If you are interested in maximizing value while exiting a company should begin at least five years before the planned exit date. This gives you a better chance to prepare the business, increase its value and remove a business exit as the only option to fund your retirement.
[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: The KPI – Cash Flow Modeling and Projections and What’s It Worth? Valuing a Business for Sale. This is an updated version of an article originally published on April 3, 2015.]