For a successful transition to take place, a business owner must identify the roadblocks that can reduce the value of their business and limit their exit options. To do so, business owners need to start building value in their companies well before that transition happens. That means making sure they’re not the central reason for its continued success.
Smart Business spoke with Bob Bove, Wealth Advisor & Certified Exit Planning Advisor at The 4:8 Group, about strategies owners can use today to create a stronger, more transferable business.
What issues arise if a business is too dependent on its owner?
If a business owner were to draw a picture that visually represents their role in their business and they’re stuck in the middle like a hub in a bicycle wheel, that can be a barrier to maximizing value at the time of an exit.
The hub-and-spoke model is an illustration of how dependent a business is on its owner for survival. The hub-and-spoke model is only as strong as the hub. The moment the hub is overwhelmed, the entire system fails. Acquirers generally avoid these types of managed businesses because they understand the dangers of buying a company too dependent on the owner.
What are the warning signs that show a business could be too dependent on its owner?
Most business owners give themselves final signing authority. But what happens if they’re away for a couple of days and an important supplier needs to be paid? Consider giving an employee signing authority up to a certain amount, and then change the mailing address on the bank statements so they are mailed to the business owner’s home rather than the office. That way, the business owner can review everything coming out of the account and make sure the privilege isn’t being abused.
Flat revenue from one year to the next can be a sign the business owner is a hub in a hub-and-spoke model. Like forcing water through a hose, a business owner has only so much capacity. No matter how efficient they are, every business dependent on its owner reaches capacity at some point. Consider narrowing the business’s product and service line by eliminating technically complex offers that require the owner’s personal involvement, and instead focus on selling fewer things to more people.
If an owner spends their vacations dispatching orders from their cellphone, it’s time to cut the tether. Start by taking one day off and seeing how the company does. Build systems for failure points. Business owners should be able to work gradually up to taking a few weeks off without negatively affecting the business.
It’s good to have the pulse of the market, but knowing every single customer by first name can be a sign that a company is relying too heavily on an owner’s personal relationships as the glue that holds the business together. Owners should consider replacing themselves as a rain maker by hiring a sales team. And though it may seem inefficient, have a trusted employee shadow the owner when they meet customers so that over time those customers become accustomed to dealing with someone else.
Employees, customers and suppliers constantly cc’ing an owner on emails can be a sign that they are looking for the owner’s tacit approval or that the owner has not made clear when they want to be involved in the work of others. Start by asking employees to stop using the cc line in an email. Instead, ask them to use the “to” line if it’s either necessary for the owner to be made aware of something or the owner is required for a specific action.
Before an exit is imminent, business owners should work with a certified exit planning adviser to understand how buyers view the business. They’ll identify weaknesses and help put a plan together to address them. In doing so, business owners not only maximize value at an exit, but also have the opportunity to extract more value in the years before the exit occurs. ●
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor and a separate entity from LPL Financial.
INSIGHTS Wealth Management is brought to you by The 4:8 Group.
