Building Business Value

Tip 1: Avoid Owner-Dependence To Create Building Business Value The Business That Everyone Wants To Buy

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 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 these questions, you need to shift this dynamic immediately. Owners should be focused on developing long-term strategy, analyzing trends, maximizing business value, and developing leadership in 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 and 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 rollercoaster 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 more satisfied than those who don’t. A healthy objectivity about the business provides valuable perspective for decisions.

Value Risk: High

Businesses that 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 processes and incremental improvements. When eventually selling the business, a buyer needs to be confident that successors can continue (and grow) the company’s 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 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 person in command, and ensure they are well trained, committed to the company’s 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.

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 business brokerage, valuation and exit planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.