If you (a business owner) left for a month, or suddenly walked out of your business, could your team run it in your absence?
Your answer should be yes. If it’s not, then any potential buyers are taking on significant risk when they invest in your business. A business that can’t operate without its owner is a business that might tank when it is sold. If you’re planning an exit—and you should always be planning an exit because that’s a key component of ownership—here are some strategies to reduce owner dependence.
Make Changes Well Before a Sale
Don’t wait until your business is already on the market to address issues of owner dependence. You need to begin building an expert management team now. Many buyers have plenty of cash, but they lack the talent and operational know-how to run a business. Consider whether your business as it stands now can fill in that gap. If not, it’s time to begin doing some hard work.
Assemble an Independent Board
If you have sufficient lead time, an independent board offers a sense of continuity, thereby mitigating risk. Board members also offer outside perspective and experiences that can improve practices and prevent the misguided vision of one or two people from harming the whole business. Many owner-operators are at first resistant to this idea. Upon considering that virtually all large businesses have a board, it becomes clear how helpful one can be.
Build and Support a Strong Management Team
Many businesses have a CFO in name only, or none at all. You need a skilled and experienced management team who can run the business without you. Buyers may want to bring in an outside expert if you don’t already have a strong management team. That exposes the business to risk and can erode value. So consider bringing in your own team ahead, and reaping the reward of increased value that comes with increased expertise.
Once your team is in place, support them to implement new and effective processes. Lean on their expertise and rely on their experience, even when they disagree with you. A key value of an expert team is a chance to get different opinions on the way you’ve always done things.
If the processes necessary to run your business live only in your head, you are setting a buyer up for failure. Buyers want sound documentation of these processes so that they can adapt them, change them, or follow them to the letter.
Likewise, you must maintain rigorous documentation of all contracts, including with freelancers, as well as details on any and all intellectual property, client and vendor agreements, and other valuable relationships. If you can’t prove that an agreement is memorialized in a sound contract, it might as well not exist.
Owner dependence is a barrier to M&A, but it’s also associated with other risks—weak management, poorly documented financials, intellectual property exposure, lacking legal agreements, and more. Tackling these issues now can greatly increase your business’s success, and make the process of selling your company much easier and less stressful, whether you do so next month or next decade.