Why Buyers Prefer Businesses With Strong Leadership

by Dave Driscoll

When you start a business, you believe you are the one; you are the center of the universe. Everything is dependent upon your skills, efforts and dedication. But what you should come to realize as the business grows is that you are the least important person when it comes to value. Your business is worth much more with a strong second-in-command and management team in place.

If you ever hope to sell your business for maximum value and move on to your “life beyond business,” your company can’t be dependent on you. No buyer is interested in acquiring a business that depends heavily on the current owner.
Buyers look for a predictable continuation of business productivity and customer satisfaction as well as cash flow. If a business is owner-dependent and that owner is going to walk out the door shortly after the sale, how can the buyer expect ongoing business success and profitability in the future?

The solution is for the owner to consciously make the business less dependent on his/her own skills and tribal knowledge and more reliant on a second-in-command who is capable of responsibly making decisions and running the business. Then take it one step further: Which other duties can you delegate to competent staff? Provide the training and support needed to build abilities and confidence. The ultimate goal is to have a strong leadership team in place to sustain success under a new owner.

A key point: You must sincerely grant your leadership team the true authority to lead as needed. If you second-guess their decisions, you undermine authority and demonstrate that everything really still requires your touch. Delegating authority can be unnerving, but a business that is owner-dependent is worthless when that owner leaves. Your business should be able to function and succeed if you are unavailable for a few weeks.

I was contacted by a potential seller more than three years ago. She wanted to sell her business to spend more time with her family. We determined the value of the business by identifying the total cash flow the business created for the owner and applying the appropriate industry multiple of earnings. The seller was pleased with the value, but we advised her not to sell.

The business was totally dependent upon the owner’s continuous management and attention. If we had listed the business on the market, a successful sale at a decent price would not have been probable. Instead, we recommended that she develop a management team structure that would transfer responsibility and authority for day-to-day operations of the business to several managers while the owner continued to manage the finances and direction of the business.

Fast-forward to today. That owner called to update us on her progress. She has successfully developed two managers who run the business. These leaders demonstrated the capability, commitment and responsibility to manage the business, and the owner granted them that authority. With a more sellable business, we recalculated the numbers, and the cash flow is also better.

The overall health of a business usually improves when an owner delegates responsibility. The organization is better able to respond to clients’ and associates’ needs, and multiple perspectives generally lead to better solutions. Likewise, in this case, the business value has increased and the probability of a successful sale is high.

Often, our recommendations to small-business owners are not really heard because of a single-minded attitude or a perceived lack of time. In this situation, we were impressed that the owner enthusiastically acted on our advice. Not only is she pleased that the business value has increased significantly, but delegating business responsibilities has actually alleviated some stress and allowed her to enjoy more flexibility. The business is now positioned to be marketed and sold with an outlook for success with a new owner.

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.