Five Ways to Reduce Owner Dependence and Build a Buyer-Ready Business

By Generational Equity

09/29/2017

“When it comes time to sell, a founder’s dedication can actually be a detriment to valuation” – Why Your Business Shouldn’t Need You, Axial

Business owners – does anyone know your company as well as you do?

If you answered no, then your chances of finding the optimal buyer for your business just dropped. Why? Because when buyers size up your company as a target for acquisition, they want to know it has great prospects with or without your guidance. If you fall into the trap of building a business that is too reliant on your vision, ideas and dedication to succeed (or if you make all of the daily decisions), it becomes very difficult to exit for the optimal value.

It all boils down to this – RISK is a buyer’s least favorite word and something they seek to reduce at all costs. A company that relies solely on the guidance of its owner constitutes a major risk. Will the business continue to grow without the influence of its owner? Is the company’s success dependent on the personality of its founder? Are the relationships with key clients managed by the owner?  These questions severely impact the value of your business in the eyes of potential buyers.

“The transferable value of your company is what someone is willing to pay you for your company without you. If you haven’t worked on making your business transferrable — meaning it works without you — you’re going to get less when you sell your company. Period.”

So, ask yourself these three key questions:

• Are you the primary reason for your company’s ongoing growth?
• Have you built a management team that understands your company inside and out?
• Are the processes that make your business tick documented, or do they reside solely between your ears?

If you feel your business suffers from a severe case of owner dependence, here are five helpful ways you can reduce this reliance.

1. Build Your Management Team

First things first – build the key players in your team. Hiring the right people that are passionate about your industry and understanding how your business works is critical in demonstrating its future success to potential buyers.

These will be the people that will build on the foundations you laid for your business, contributing ideas, hard work and taking responsibility for its long-term growth. Hopefully, by choosing the right people, your business will run smoothly whether you’re there or not.

2. Delegate, Delegate, Delegate

It’s not enough to simply hire the right people: you need to empower them to make decisions. Of course, we understand it can be difficult to delegate responsibilities when you believe you know how to run your company better than anyone (a very dangerous trap to fall into by the way).

But, a buyer needs reassurance that your business will operate well without your presence. Resisting the desire to delegate hinders company growth and buyers will be unsure about its potential when it’s no longer in your hands.

3. Document Key Information

You may have all the answers, but how can you prove it? Even if you and your team have a crystal-clear view of the processes that make your business run, it’s important to document these so prospective buyers can grasp them.

Take the time to note your procedures down to help familiarize interested parties, as well as bring potential new members of your management team up to speed quickly. We understand that most entrepreneurs loath “paperwork” like this.  However, if you take the time now to document your procedures, it will pay off handsomely when you negotiate with buyers later.

4. Talk Up Your Team

If you have built the perfect management team, don’t be afraid to shout it from the rooftops. A potential buyer needs to know the business will grow without you and one of the best ways to do this is to show them how capable your management team is. Endorse their knowledge and expertise – remember, these are the key assets of your company’s growth, so they will be expected to play that role for the next owner.

Above all else, talking about how good your team is takes attention away from how big a role you play, which is what buyers want to see.  So when you create your organizational chart and bios for your key people in your offering memorandum, be sure that your bio is not the longest!

5. Build with the Exit in Mind

Finally, it’s essential to take the mindset that you will one day exit your business. It may not be tomorrow, next year or in the next ten years, but it will happen, which is why it’s vital to prepare for it now. This approach will ensure you follow the above steps – by building an effective team around you, as these human assets will enhance your company’s valuation.

Overall, this attitude will help you avoid the red flags buyers pick up on and will end up enhancing the appeal of your business. If you’d like to learn more about how to adopt this mindset and sidestep the trap of owner dependence, download our complimentary white paper How to Make Your Company “Buyer Ready”.

For a more in-depth look, join us for a complimentary executive conference, which are held throughout North America all year round. The experienced M&A professionals at Generational Equity will guide you on building a buyer-ready company and creating the optimal exit strategy, as well as getting to know you and your ambitions for your business. In just a short space of time, you will leave with a clear understanding about your business future, armed with valuable knowledge on how to get there.

Find out when we will be bringing an executive conference to your area next on our website or call us today on 972-232-1121.