One of the core messages of my practice is reducing owner dependency, so the business can run without you and you are in control of it again. On Tuesday I sat in on a session the Surrey & White Rock Board of Trade (SWRBOT) put on about exiting your business, and it reinforced how important it is to fix that problem if you have it. I exited a business of my own recently, and a lot of what they described was familiar.
The people running the session work with owners at the point of sale, and one of the most common situations they see goes like this. Someone approaches an owner wanting to buy the business, or the owner decides it's time and starts talking to buyers, and it turns out the business isn't worth what the owner thinks it is, or what they want for it. Most of the time the business simply isn't ready to be sold, and the owner finds that out at the point where there's no longer time to get it ready.
If you're reading this and thinking you'll never sell, or that selling is a distant-future event you can deal with later, I'd ask you to keep reading anyway. Everyone exits their business at some point, like it or not. You might sell it, hand it to family, or wind it down, and some owners leave in a way they didn't choose, through illness or something worse. Every one of those outcomes goes better when the business can run without you, and getting a business to that point properly takes years. The owners who leave it until they've decided to go find out that the timeline can't be rushed.
Owner dependency was the first reason on their slide. They broke it into three parts: the owner owns the customer relationships, the owner owns the key processes, or the owner makes all the decisions. Plenty of businesses have all three. When someone asked what that does to value, their answer was that owner dependency on its own could take anywhere from 10 to 20 percent off the price, and make the business much more difficult to sell at all.
I wrote about the value side of this in August, in what your business is worth without you, mostly from the point of view of a buyer looking across the table at the owner. What the session added was a range, from people who see these deals regularly, for how much it tends to cost. It's worth going through the three parts one at a time, because owners usually recognize one of them in themselves and miss the other two.
Customer relationships are the one owners tend to be proudest of, which is what makes them risky. In most small businesses the early clients came through the owner's network: friends, people from a previous job, referrals from people who trusted the owner personally. Over the years those clients get used to calling the owner directly, and the owner gets used to taking the call, because it's faster and because he likes them. From where the owner sits that feels like great service. A buyer looking at the same client list sees customers whose loyalty is to someone who is about to leave.
Key processes are harder to see, because owners rarely think of what they know as a process. It's how you price a certain kind of job, which supplier to call when the usual one can't deliver, what a particular client means when they ask for something done the usual way. None of it is written down, because you've always been there to do it. When a buyer asks how that part of the business runs and the honest answer is that you do it, they're looking at knowledge that leaves with you unless the handover goes perfectly.
Decision making is the one I see most often, and I was guilty of it myself for a long time. Quotes wait for your approval, discounts need your sign-off, and the difficult client call, the hiring decision and what gets done first on a busy Monday all come back to you. The team may be perfectly capable, but they've learned that the answer comes from you, so they bring everything to you. I made the case in an earlier post that delegation means handing over authority, and it applies here too. An owner who hands out tasks and keeps every decision leaves the business exactly as dependent on him as it was before.
The reason this moves the price so much is that to a buyer, everything is a math problem. They're paying for the cash flow the business will produce after you've gone, and every risk to that cash flow and every month of transition has a cost they can put a number on. If the clients are loyal to you, the chance of losing some of them in the handover is higher, and the buyer prices that in. If the processes live in your head, you'll need to stay on longer to pass them along, or the buyer will need to hire someone to do what you were doing, and either one costs them. If every decision runs through you, they have to build a management layer that doesn't exist yet before they can step back from it themselves.
Each of those gets factored into the offer. Some buyers will do that math and walk away entirely, which leaves you with fewer interested buyers, and the ones who stay are pricing in the risk you've handed them. When that time comes, one business has a high risk of losing customers and a long, complicated transition, and the other can change hands quickly with a client base that stays put. Any buyer will pay more for the second one, and a good number of them won't make an offer on the first.
The part I'd put the most weight on is that none of this needs a sale to be worth doing. A business that runs through its owner can only grow as far as the owner's week stretches. Once clients are comfortable dealing with your team, the processes are written down and other people are trusted to make decisions, your time goes into growing the business, and the business can take on more than you could ever manage personally. Even if your exit is years away, fixing these problems now lets the business grow much faster and larger than it can with you in the middle of everything. That could mean increasing its value by 200 percent, which makes the 10 to 20 percent a buyer would have taken off look small.
If you want a place to start, go back to the three areas and be honest about each one. Think about which clients would call you first if something went wrong, and whether there's anyone else in the business they would call. Think about which parts of the operation would stop if you weren't there to do them. Then look at the decisions you've kept that someone on your team could make today. Getting the structure in place so the business runs without you is most of what I do with owners on the operations side, and it's rarely quick. Some of it takes a few months and some of it takes years, which is the reason to start while the exit is still a long way off.