Eliminating Business Dependencies to Develop Multiple and Value Growth

Business Dependencies create substantial risk of being able to duplicate your current results in the future and sharply decrease the value of your business. Business dependencies will also change the structure of your business acquisition from the one most people would prefer that includes all the cash in one lump sum on the closing date rather than a 3 year earn out. Instead, the owner will probably have to stay on for a period of three years with an earnout based on the company’s ability to continue generating the profits in past years.

The most prominent dependency that occurs in the marketplace is a major reliance on the business owner. These types of business owners want to be involved in every decision made in the company. This type of owner struggles with delegation because they feel like no one else can handle the problem as well as then can. The combination of the above two items above puts the business owner in a situation where they need to work all the time and they have a terrible quality of life. There are certainly solutions to these issues of owner dependency. The best course is to hire and train a management team to run the business without you. It is great for your personal life, and it is great for raising your multiple on sale because your business can function without you to a management team that is already in place for the buyer.

The next dependency that we are going to discuss is dependency upon a particular customer. If more than 20% of your business is with a single customer, you have a serious risk that if that customer leaves, your business will suffer greatly. The prospects are even worse if you have a customer that makes up 100% of your revenue. If that customer leaves, your business is essentially done. Companies in the 20% to 100% dependency on customer range need to make a concerted effort to diversify their customer make up. The sales strategy should be focused on bringing in new clients to balance the books of business. In many of these concentrated sales companies, they do not have significant sales and marketing departments. They will need to build these departments which will represent an investment in growth of the value in the company if they are successful.

The next dependency we are going to discuss is dependency upon a particular supplier. If you are a company with a sole source supplier, you are at risk of a bad turn in the relationship, price increases, and the potential loss of your business operations for a period if their financial situation takes a turn for the worse. We saw some of this in the Pandemic with many of the component parts of larger products stuck in production backlogs or on shipping vessels. The Pandemic provided a good lesson on how you should have multiple supplier sources for your component product parts. Now that the Pandemic has started to fade from our memories, it is still important to diversify your supplier base to reduce risk and raise the multiple of your company.

The last dependency we are going to discuss is dependency upon a key employee. The presence of a key employee in whose hands lies the success of the business is dangerous on two levels. The first risk is that the employee could become disabled, pass away, or leave the company and you are left with a serious rebuilding problem. The second risk is that the employee could hold out for a significant portion of the proceeds from the sale because if he/she does not stay with the company, a significant reason for the purchase will no longer be on the table. To mitigate this risk, you need to build redundancy around your key employees. They may resist that it is first because they have built their own little fiefdom that provides job security and leverage. However, it is imperative that you build this redundancy to mitigate risk and increase the value of your company.

To see how you score on the various dependency risks, please take thirteen minutes to complete the Value Builder Questionnaire linked below.

https://score.valuebuildersystem.com/vision-growth/brian-kerrigan