Why Should I Know/Score My Company’s Dependence on Me?
A majority of private businesses are highly dependent upon an owner’s individual efforts in order to run efficiently. However, many owners want to be more independent of their businesses. Most owners also understand that if they are a critical part of each major part of their business, then it is going to be very difficult to grow the business and/or to have the business transition to a new owner. And, as a result of not having a transferable business, owners stand to lose much of the value that they have created in their companies.
Owner Dependence Is a Large Issue
Privately-held businesses are often centered around the owners who build them. These owners are not only active participants in the company, they also hold on to critical decision-making processes in the business. As a result, if/when the owner is not available to continue working in their business, the business suffers, and perhaps fails, in their absence. The logical extension of this process is that businesses with a high level of owner dependence can be very difficult to transfer to another owner and the company is at a high risk of quickly losing value. Also, since for most owners their business is their largest asset and the biggest part of their wealth, if they cannot transfer the value of that business to someone else, then the company’s future can be in jeopardy and the owners may lose millions of dollars in wealth.
A Path Forward for Your Key Management
Knowing your Owner Dependence Score is to provide better guidance to your key managers as to the future of the Company. Many baby boomer owners have managers in their mid-40s and early 50s who are committed to the owner’s company but are also asking about the future of the business and its ownership. They want to know about their careers and where their futures lie in regard to the succession planning for the company. Successful owners engage these managers in meaningful conversations about the running of their companies but not all owners do so with the future in mind or are able to focus those conversations on the owner reducing the company’s dependence on them individually so that the business will continue without them. This is another great reason to know your Owner Dependence Score.
Contingency Planning – Peace of Mind for Your Family
Many owners who have companies with high levels of Owner Dependence leave messes behind when those owners can no longer run their companies due to age, sickness, or some other form of disability or death. When you know the specific areas where you need to focus on building or delegating certain jobs, you are in a position to protect your largest asset, your business, and avoid the situation where a mess is left behind.
Measuring and Managing Owner Dependence Leads to Growing Your Company and Making it More Valuable
Many owners of privately-held businesses often think that growing their company and making it more valuable will translate into receiving a higher value at the time of transfer. Unfortunately, this is not always true because there are many factors that affect the successful transfer of a business which go beyond cash flow - one of which is the dependence that a business has on an owner. A potential buyer or future owner likely will not want to purchase a business that, although may have a high value, is too dependent on the owner. So, if a business is too dependent on you as an owner it may be a lot harder for you to transfer your business. Or, alternatively, you may be looking at a structure for a transaction that holds back a lot of the value until the business is proving that it can run without you.
Creating a Transferable Business
There are many ways that you can grow your business and make it more transferable to a future owner. Measuring your Owner Dependence is the first step. Beyond this step you want to work with you key managers, understand who potential buyers are and then figure out how to increase the value of your company to make it worth more to you at the time of exit. The “Creating a Transferable Business” model was designed to assist owners with this process and begins with measuring and managing Owner Dependence.
Knowing your company’s dependence on you is an important factor that will assist you in growing your company as well as impact the future transfer of your business. The more dependent the business, the slower it will grow and the less transferable it is likely to be. If you know how dependent the business is on you early on, including the specific areas that you can improve upon, you will be able to create a plan that will help you start to move away from the business and create a transferable business. Contact us to discuss your situation.
Article provided courtesy of Pinnacle Equity Solutions © 2015, not an affiliate of Lincoln Financial Advisors
Member – The Business Intelligence Institute*
*Business Intelligence Institute is a group associated within Lincoln Financial Advisors Corp. that focuses on business succession strategies.
Jeff Janes is a registered representative of Lincoln Financial Advisors Corp.
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