By: Aristata Financial

Imagine leaving your business tomorrow for six weeks. You aren’t answering every phone call, approving every decision, stepping into customer issues, or checking in with employees throughout the day. What happens? Do sales continue? Can your leadership team make important decisions? Do key customers know who to call? Can someone approve pricing, manage employees, review financial results, and solve problems without waiting for you? Or does everything start piling up until you return?

Your answer can tell you a lot about how dependent your business is on you, and that dependence can become particularly important when you’re preparing for an eventual exit.

Are You Building an Enterprise or a Job?

Many successful businesses are built around their owners. In the early years, that’s often necessary. The owner brings in customers, hires employees, manages operations, develops relationships, approves major expenses, and solves whatever problem comes up next. The problem is that the business can grow while those responsibilities never really transfer to anyone else.

An owner may have a highly profitable company with dozens of employees and still be the person everyone relies on. Key customers only want to speak with the owner. Large sales require the owner’s involvement. Employees won’t make important decisions without approval. Critical knowledge exists primarily in the owner’s head. That can create a problem when it comes time to sell.

A potential buyer isn’t only interested in what the business earned last year. They also want to understand what happens to those earnings after ownership changes. If the relationships, knowledge, decision-making, and sales ability that produced those results leave with the seller, the buyer has to account for that risk. In the most extreme cases, the buyer isn’t acquiring a self-sustaining enterprise. They’re buying themselves a job.

Why Owner Dependence Matters to a Buyer

Put yourself in the buyer’s position. Suppose you’re considering two businesses with similar revenue and profitability. One has a leadership team that manages day-to-day operations, established processes, diversified customer relationships, and employees who can make decisions without the owner. At the other company, the owner generates most new business, maintains the largest customer relationships, approves important decisions, and has knowledge that hasn’t been documented or transferred to anyone else.

Those businesses may look similar on an income statement, but the risks associated with taking ownership can be very different. Heavy owner dependence doesn’t necessarily mean a business can’t be sold. It can, however, influence how a buyer views the transition. A buyer may want the seller to remain involved longer, structure more of the purchase price around future performance, or otherwise protect themselves against the possibility that the business changes significantly when the owner leaves.

Reducing Owner Dependence

Reducing dependence doesn’t mean the owner needs to stop contributing to the business. It means building an organization that doesn’t require the owner to personally hold everything together. That may start with identifying where you’re still essential. Are you the primary relationship for your five largest customers? Are you the only person who knows how pricing decisions are made? Does every significant expense require your approval? Are important processes documented, or does everyone simply know to ask you?

Once you identify those areas, you can begin intentionally transferring responsibility. That could mean developing a stronger management team, documenting key processes, introducing other employees into important customer relationships, establishing clear decision-making authority, and creating reporting systems that allow leadership to understand how the business is performing. It also means allowing people to make decisions without you. An owner can hire great people and still create dependence if every important decision eventually makes its way back to their desk.

Take the Six-Week Test

A healthy, less owner-dependent business doesn’t require everything to go perfectly while the owner is gone. Problems will still happen. Customers will still have questions. Employees will still need to make difficult decisions. The difference is that the organization knows how to respond.

Imagine taking a six-week vacation with limited contact. Your management team continues meeting, financial reports are produced and reviewed, customers receive the same level of service, and sales opportunities continue moving forward. Employees know who has authority to make decisions, and problems are addressed without waiting for you to return. When you come back, you may have plenty to catch up on, but the business continued operating without you.

For an owner preparing for an eventual transition, that’s about more than getting some time away from the office. It’s evidence that you’ve built something capable of continuing beyond you. Ultimately, that’s what a future buyer is purchasing.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Aristata Financial and not necessarily those of Raymond James.

You should discuss any tax or legal matters with the appropriate professional.