Selling Your Business; “Owner Dependence” Comes in Many Forms
It’s widely understood that the more a business is dependent on the owner(s), the lower the valuation when it comes time to look for an exit. Buyers hate risk, it’s as simple as that. Dependence on any one thing adds risk whether it’s the owners, a key employee, customer, supplier, technology, etc. Sometimes as a business owner you need to look at your business as the buyer. Ask yourself a simple question: “Would you buy your own business?”.
The classic owner dependence scenario is the control freak who doesn’t delegate and thus never develops a management team. The owner has all the customer relationships, intrinsic business knowledge, operational expertise, etc. etc. If these owners can actually find a buyer, they typically get a small amount of money upfront and have a long earnout period. The buyer needs to know the owner will be around long enough to help transfer the relationships and/or knowledge to the new team. When you’ve run your own show for a long time, working for someone else for any significant period of time is culture shock. Many don’t last and leave significant money on the table.
But there are other forms of owner dependence that may not seem as obvious. Many businesses qualify for some kind of “eligibility” – Women-Owned, Minority-Owned, Veteran-Owned, etc. This eligibility provides benefits in multiple areas including winning new business and qualifying for certain lending programs. While this status can be extremely helpful when you are building your business, you need to consider the effect when you plan to sell your business one day. If your business is so dependent on this status, you may have limited your buyers only to those who can qualify for the same status. Grow your business so you don’t have a dependence on any one aspect of your business.
Too often we meet with a business owner and they think their business is worth $10-$15mil and it’s only worth half that today. Successful exits don’t happen without sound exit planning and they don’t happen overnight. Talk to your team of trusted advisors; your CPA, wealth advisor, M&A advisor, attorney – they all have a role in your successful exit.
Best of luck, but with proper planning, you won’t need the luck!
Bob Maiden, Partner Stony Hill Advisors [email protected] 610-600-1060