Business Growth & Exit Ready Weekly - July 23: The Paradox of Value: Why Your Business Suffers When You're Indispensable

Welcome to the Business Growth & Exit Ready weekly newsletter! July 23rd, 2024.

Your weekly dose of resources, strategies for growth, scaling, profit maximization, and lucrative exits.

In this newsletter:

Our featured article, "The Paradox of Value: Why Your Business Suffers When You're Indispensable,"?explores the counterintuitive truth that the more essential you are to your business's daily operations, the less valuable it becomes. It offers strategies to build a self-sustaining enterprise that thrives independently, ultimately increasing both your personal freedom and your business's market value.

We're also excited to highlight "Built to Sell: Creating a Business That Can Thrive Without You" by John Warrillow as our book of the week.

This book is an excellent companion to our article, offering practical advice and actionable steps to overcome the "paradox of value" in business ownership. Whether you plan to sell your business or simply want to create a more valuable and self-sustaining enterprise, "Built to Sell" provides invaluable insights for any business owner.

Kind regards,

Rod Fraser

Get our Building High-Performing Teams PDF. It's free. Download now!

Quotes about making your business more valuable by not working in it:

“Every business owner needs to sack themselves as an employee!” Rod Fraser Investor & Business Mentor - Business Growth Strategies Pty Ltd

"The best businesses are the ones that run without their owners. The worst businesses are the ones that can't." John Warrillow, "Built to Sell: Creating a Business That Can Thrive Without You"

"If your business depends on you, you don't own a business—you have a job. And it's the worst job in the world because you're working for a lunatic!" Michael E. Gerber

This week's topic:

The Paradox of Value: Why Your Business Suffers When You're Indispensable

Unveiling the Hidden Trap of Owner Indispensability

Picture this: you've built your business from the ground up, pouring your heart and soul into every aspect of its operations. You're the linchpin, the go-to person for every decision, big or small. Surely, this level of involvement makes your business more valuable, right? Wrong. Welcome to the paradox of value in business ownership.

Contrary to popular belief, being indispensable to your business can actually diminish its worth. This counterintuitive concept is a crucial lesson for business owners, particularly those eyeing a lucrative exit strategy. As Dr. John Warrillow, founder of The Value Builder System, astutely observes, "The more involved you are in the day-to-day running of your business, the less valuable it will be when it comes time to sell" (Warrillow, 2015).

Understanding this dynamic is not just important; it's essential for any business owner aiming to build a sustainable, scalable, and ultimately sellable business. Let's explore why being irreplaceable might be the biggest obstacle to your business's true potential and long-term value.

The Indispensable Owner Myth

Many business owners wear their indispensability as a badge of honour. They believe that their constant presence and involvement in every facet of the business is a testament to their dedication and expertise. This mindset is particularly prevalent in small to medium-sized enterprises (SMEs) in Australia or small-to-medium-sized businesses (SMBs) where owners often feel compelled to be hands-on in all aspects of their business.

According to a survey by the Australian Bureau of Statistics (ABS), 61% of small business owners work more than 40 hours per week, with a significant portion working over 60 hours (ABS, 2021). This high level of involvement often stems from a desire to maintain control and ensure quality, but it can lead to a dangerous dependency.

A real-life example of this dependency is Gerry Harvey, co-founder of Harvey Norman. In a 2013 interview with The Australian Financial Review, Harvey admitted that he had no succession plan and that the business relied heavily on his involvement. He stated, "While I'm alive, I run it," highlighting the risks of owner dependency even in large, successful businesses (Knight, 2013). This scenario illustrates the fragility of owner-dependent businesses and the challenges they face regarding long-term sustainability and value.

The Impact on Business Value

From a potential buyer's perspective, a business that relies heavily on its owner is a risky investment. Dr. Richard Mowrey, a leading expert in business valuation and exit planning, explains, "Buyers are looking for businesses that can run without the current owner. The more dependent the business is on the owner, the less valuable it becomes" (Mowrey, 2016).

The risks associated with purchasing an owner-dependent business are numerous:

1. Knowledge transfer challenges
2. Client relationships tied to the owner
3. Lack of scalability
4. Operational inefficiencies
5. Higher risk of business failure post-acquisition

These factors significantly impact valuation and sale prospects. A study by BizBuySell, a leading online business-for-sale marketplace, found that businesses with strong, owner-independent systems and processes sold for an average of 50% more than similar businesses heavily reliant on their owners (BizBuySell Insight Report, 2023).

Signs You're Too Involved

Recognising the signs of over-involvement is the first step toward addressing the issue. Here are some key indicators that might be too essential to your business operations:

1. You're the only one who can make important decisions
2. Customers insist on dealing with you personally
3. You haven't taken a proper holiday in years
4. Your business stalls when you're not present
5. You're involved in every aspect of daily operations

To assess your level of involvement, ask yourself these questions:

• Can your business operate smoothly for a week without your input?
• Do your employees have the authority to make decisions in your absence?
• Are there documented processes for key business functions?
• Can someone else in your business explain your business model and strategy?

Real-life examples of owner-dependency issues are numerous and often cautionary tales for entrepreneurs:

1. Elon Musk and Tesla: Despite Tesla's success, the company has been criticised for over-reliance on Elon Musk. In 2018, when the U.S. Securities and Exchange Commission (SEC) sued Musk, Tesla's stock price dropped by 14% in a single day, showing how closely the company's perceived value was tied to its founder (U.S. Securities and Exchange Commission, 2018).
2. Yvon Chouinard and Patagonia: Yvon Chouinard, founder of Patagonia, recognised his own indispensability as a problem. In his book "Let My People Go Surfing," he describes how he had to force himself to step back and empower his employees to make decisions, ultimately leading to stronger company growth (Chouinard, 2005).
3. Steve Jobs and Apple: When Steve Jobs was forced out of Apple in 1985, the company struggled, demonstrating its over-reliance on its founder. However, Apple was forced to develop stronger internal processes during Jobs' absence, which ultimately benefited the company when Jobs returned (Isaacson, 2011).
4. Ray Kroc and McDonald's: In contrast to these examples, Ray Kroc built McDonald's with systems and processes that could operate without him. This approach allowed the company to scale rapidly and maintain consistency across thousands of locations (Love, 1986).

These examples illustrate how owner dependency can impact businesses of all sizes, from small startups to multinational corporations. They underscore the importance of building a business that can thrive independently of its founder or key individuals.

Strategies to Reduce Owner Dependency

Reducing owner dependency requires a multi-faceted approach. Here are key strategies to consider:

Delegation: Building a Strong Management Team

Empowering employees is crucial. As management guru Peter Drucker famously said, "No executive has ever suffered because his subordinates were strong and effective" (Drucker, 1967). Start by identifying key roles that can take over your responsibilities and invest in developing your team's skills and decision-making abilities.

Standardisation: Developing Robust Processes and Systems

Implement standardised processes that ensure consistency and quality, regardless of who's at the helm. The E-Myth author Michael Gerber advises, "The system runs the business, and the people run the system" (Gerber, 1986).

Documentation: Creating Comprehensive Manuals and Guides

Document all critical business functions, from operations to client management. This not only ensures continuity but also adds significant value to your business. As noted by John Warrillow, "Documented processes and systems can increase the value of your company by up to 50%" (Warrillow, 2015).

Automation: Leveraging Technology

Embrace technology to automate routine tasks and processes. A report by Deloitte found that Australian businesses that invested in automation saw a 15% increase in productivity and a 12% reduction in operating costs (Deloitte, 2022).

Building a Self-Sustaining Business

Transitioning from an owner-dependent to an autonomous business requires a shift in mindset and approach. Here are steps to consider:

1. Develop a clear vision and strategy that can be communicated and implemented by others
2. Foster a culture of innovation and problem-solving among your team
3. Implement regular training and development programs
4. Create a strong second-in-command or management team
5. Gradually reduce your involvement in day-to-day operations

Leadership plays a crucial role in this transition. As noted by Jim Collins in his book "Good to Great", "The moment a leader allows himself to become the primary reality people worry about, rather than reality being the primary reality, you have a recipe for mediocrity, or worse" (Collins, 2001).

Consider the success story of Atlassian, the Australian software company. Founders Mike Cannon-Brookes and Scott Farquhar built a business that could operate independently of them, focusing on creating strong systems and a robust company culture. This approach led to a successful IPO and continued growth and innovation post-listing.

Preparing for a Lucrative Exit

Reducing owner dependency significantly increases your business's attractiveness to potential buyers. As noted by Geoff Green, author of "The Smart Business Exit", "A business that can run without its owner is worth far more than one that can't" (Green, 2014).

When showcasing your self-sustaining business to potential buyers:

1. Highlight your strong management team and their roles
2. Demonstrate documented processes and systems
3. Show evidence of consistent performance in your absence
4. Present a clear growth strategy that doesn't rely on your involvement

The long-term benefits of creating a valuable, independent business extend beyond just the sale price. It provides more freedom, reduces stress, and allows you to focus on strategic growth rather than day-to-day operations.

Embracing the Paradox: Your Path to True Business Value

The paradox of value in business ownership is clear: the more indispensable you are, your business becomes less valuable. Reducing owner dependency increases your business's value and creates a more sustainable and enjoyable entrepreneurial journey.

Start implementing changes today. Assess your current level of involvement, identify areas where you can step back, and empower your team to take on more responsibility. Building a self-sustaining business is not just about preparing for an exit; it's about creating a robust business that can thrive with or without you.

Rod Fraser - Investor + Business Mentor

Business Growth Strategies

References:

Australian Bureau of Statistics (ABS) 2021, Characteristics of Australian Business, 2020-21 financial year, cat. no. 8167.0, ABS, Canberra.

BizBuySell 2023, BizBuySell Insight Report, viewed 15 July 2024, https://www.bizbuysell.com/insight-report/.

Chouinard, Y 2005, Let My People Go Surfing: The Education of a Reluctant Businessman, Penguin Books, New York.

Collins, J 2001, Good to Great: Why Some Companies Make the Leap...And Others Don't, HarperBusiness, New York.

Deloitte 2022, The Impact of Automation on Australian Businesses, Deloitte Australia, Sydney.

Drucker, P 1967, The Effective Executive, Harper & Row, New York.

Gerber, M 1986, The E-Myth: Why Most Businesses Don't Work and What to Do About It, HarperCollins, New York.

Green, G 2014, The Smart Business Exit: Getting Rewarded for Your Blood, Sweat and Tears, Panoma Press, St Albans.

Isaacson, W 2011, Steve Jobs, Simon & Schuster, New York.

Knight, E 2013, 'No Succession Plan for Harvey Norman, Says Gerry Harvey', The Australian Financial Review, 27 November, viewed 15 July 2024, https://www.afr.com/companies/retail/no-succession-plan-for-harvey-norman-says-gerry-harvey-20131126-jyud8.

Love, J F 1986, McDonald's: Behind The Arches, Bantam Books, New York.

Mowrey, R 2016, Business Valuation and Exit Planning for Closely Held Businesses, Business Expert Press, New York.

U.S. Securities and Exchange Commission 2018, Elon Musk Settles SEC Fraud Charges; Tesla Charged With and Resolves Securities Law Charge, viewed 15 July 2024, https://www.sec.gov/news/press-release/2018-226.

Warrillow, J 2015, Built to Sell: Creating a Business That Can Thrive Without You, Portfolio, New York.

Book of The Week:

"Built to Sell: Creating a Business That Can Thrive Without You" by John Warrillow

In "Built to Sell," John Warrillow presents a compelling roadmap for entrepreneurs looking to build a business that can prosper without them. Through the story of fictional small business owner Alex Stapleton, Warrillow illustrates the journey from an owner-dependent business to a valuable, sellable enterprise.

Key takeaways from the book include:

1. The importance of having a standardized service offering
2. How to build a management team that can run the business without you
3. Strategies for creating recurring revenue streams
4. Tips for documenting your processes and systems
5. Guidance on timing the sale of your business for maximum value

Places to Connect

Connect on LinkedIn: Rod Fraser's LinkedIn Profile - Connect professionally and stay updated with the latest strategies and insights.

Join my LinkedIn Group: Business Growth & Exit Ready Network - Connect with business owners, professionals, and investors focused on scaling and preparing for profitable exits. Gain insights, share experiences, and access resources to help you achieve your business goals.

Subscribe to my Exit Ready Blog?and receive in-depth articles on growth strategies, scaling tips, and preparing for a successful business exit delivered weekly.

Feel free to join our network, subscribe, and connect. Together, we can achieve remarkable growth, build a great team, and prepare for successful business exits!

Thanks for participating in the Business Growth & Exit Ready – weekly newsletter!

Let’s Partner!

Have a great week,

Rod Fraser - Investor + Business Mentor

Business Growth Strategies Pty Ltd

P.S. If, for some silly reason, we are not connected on Facebook, please shoot me a friend request! https://www.facebook.com/rod.fraser/

#Businessvaluationstrategies #ExitplanningforSMBs #Buildingself-sustainingbusinesses