Reaching Graduate Level: Eliminating Business Owner Dependence

Skilled Management Teams Increase Company Value

Because owner dependence is definitely a thing, ask yourself this question: If you decide to take six months off from the business, can it survive without you for an extended period of time?

If your answer is “Yes,” congratulations. You have achieved something most business owners only dream about. If your answer is “No,” you should consider implementing strategies to lessen the dependency on you and strengthen your management teams.

Why Capable Management Teams Increase Business Valuation

It is common knowledge among business exit professionals and business brokers that when a business can operate without the owner(s), it tends to be worth more to a potential buyer than a business that requires the owner’s day-to-day involvement to run properly. The reasons are simple.

• Business sustainability is very important — From a buyer’s point of view, a business must survive long past the current owner’s involvement to recognize a proper return on investment. A business that can achieve that is worth more.
• Additional cash flow — Prospective buyers will always try to estimate a business’s annual free cash flow. If the current owner is required to stay post-transaction, it reduces the cash flow available to the buyer and, therefore, reduces the value of the business.
• More potential buyers — A business that can run independently of the owner may attract additional buyers, financial investors with no ties to the industry and no industry experience. More potential buyers can drive the purchase price upward.
• Indication of a good management team — A business not dependent on the owner(s) is indicative of a good management team. Strategic buyers tend to value a management team’s capability. They will pay a premium for a business that runs effectively without an owner.

Eliminating owner dependence opens lucrative exit options. Owning the business as an investor but not worrying about daily operations is the graduate level of ownership. Unfortunately, most business owners do not see this as a possible outcome. The bottom line is once you reach the graduate level, all exit options are available because, as we all know, the best time to sell a business is when you don’t need to.

Strategies to Eliminate Owner Dependence

So you are probably saying, “Great! You convinced me that my business can be worth more if it is not dependent on me. But how do I do it?”

First, as a warning, the following action items might be easy to understand but difficult to implement. It all hinges on you accepting that other people can do some things as well as you can. Let go of your desire to control everything, and focus on installing qualified people.

Here’s a to-do list when you and your team are ready to move forward.

• Make a task list – Draft a list of all the tasks that only you can perform for the business, and describe why. Now you have a clear snapshot of the current state of affairs and an idea of what you need to delegate over time to eliminate owner dependence. You’ll begin to understand that one person can’t accomplish all those things effectively. There simply aren’t enough hours in a day.
• Delegate responsibilities – You have a management team in place, so begin delegating the tasks you identified. Start with administrative tasks, a huge time drain. Look at one function at a time, identify your successor, train them, and then let go. This process may take years, and none of us is getting any younger.
• Hire out routine tasks – If you can hire someone to do a job at less than your salary, do it. For example, if you routinely manage your own calendar, hire a clerical person who can do it for an hourly wage. You save money and open several hours a week to concentrate on high-level work.
• Accounting personnel – Finance and bookkeeping are critical proprietary functions, but a well-vetted accountant or bookkeeper can be worth their weight in gold, particularly when you’re trying to step back. It may be helpful to move your financial functions to a cloud-based system with a dedicated manager.
• Management reporting systems – The key to stressless delegating is information. Effective reporting provides a window into what is happening in your business whether or not you’re onsite. Key performance indicators (KPI) or critical success factors (CSF) show how your team is performing while you’re 5,000 miles away.
• Strategic planning – If you want others to run the company, you must provide a concrete plan and clear direction. But you needn’t be onsite to do that. Initiate a strategic process with key personnel in which you specify and communicate the company’s direction, strategies, milestones, and budget.
• Tie employees’ compensation to goals – It is common to tie about 15% of employee compensation to achieving company goals. Those goals may be strategic, operations-oriented, sales-related, or a combination. You’ll need a clear connection between the company’s performance and individuals’ pay rates. That incentivizes your team members to continue minding the store when you are not around.
• Develop your management team – No company can afford to skip continuous management training and development. Cross-train employees to understand and handle other roles when necessary. Empower every employee to make decisions, solve problems, and troubleshoot issues compatible with their job levels. Encourage learning from mistakes and support high-performing teams while you identify emerging leaders.
• Take a vacation – This is an outstanding piece of advice. Take regular time away from the business, a week or more. You can evaluate how well the business runs without your day-to-day presence. During this time, your team learns self-reliance, they begin to feel your trust, and develop a sense of ownership of their roles. And you? You get time to brainstorm the next phases of your business.

Whether or not you are planning a business exit, eliminating owner dependence is hands down, the right way to grow. The team gets stronger, everyone feels more satisfied, and you find yourself in a situation many business owners only dream of.

This process of planning and building a skilled management team to hold down the fort takes time. Everyone, including you and your managers, needs to be on board. Begin right now – it is too late to move on down the road to independence the year before your anticipated business exit. Many companies begin putting their exit strategies in place five or more years in advance, so create that list we talked about. Prepare your plan, identify and train your team, and increase your business value.

You may also like:

• Developing an Exit Plan: Mission Critical
• Planning and Staging a Company for Transition

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

• Roadmap to Selling a Business or Taking on Outside Investors
• It’s So Hard to Say Goodbye: Minimizing Risks When Terminating an Employee
• The Startup/Small Business Advisor

This is an updated version of an article originally published on September 18, 2019.]

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