An unfortunate reality for too many business owners with good intentions: “I can’t take a vacation. This place couldn’t function without me!” If you’re a business owner – and you’ve found yourself thinking similar thoughts – read on. I’ll explain two things in this article:
- How running a business that “can’t function without you” will end up costing you a lot of money when it comes time to sell.
- How to simplify your transition from running the show to a “hands-off” approach – without blowing everything up in the process.
But first it’s worth noting: I started my career as a roughneck in the oilfield. And in the oilfield, getting your hands dirty is more than a point of pride… It’s a way of life.
Owners who are proud operators would much rather be “in the game” than sitting on the bench. The idea of “absentee ownership” isn’t even on the radar for most small business owners. And a strong Owner/Operator leading the way is necessary for most companies in their early days. It’s impressive, it’s admirable, and when a boss is out in front, the employees notice. But if you hope to sell your business - even if that decision is years down the road - “getting your hands dirty” is a surefire way to hurt your valuation.
If your business lives in the neighborhood of +$1 million revenue, stepping back and washing your hands of the day-to-day operation will put more cash in your pocket when it’s time to sell.
The surprising truth about selling your small business starts with an alarming statistic: Less than 30% of businesses for sale ever find a buyer. And the businesses run by owners who aren’t always there? They tend to attract more buyers and higher offers. So how do you avoid becoming one of the 70% of small businesses left without a buyer - and worse - left without any “next step” once it’s time to retire? The answer is simple: You need to work less.
This might sound counterintuitive – how is a business worth more because the owner does less work? Right now you’re someone who is running a business rather than someone who is looking to purchase a business. To you, an “absentee” business owner seems suspicious. Lazy even. How can they make sure everything is up to snuff if they aren’t even around to oversee operations?
The short answer is: they let things break and then they build systems. More on this later. First, in order to understand why your business is worth more if you are less involved…
Let’s talk about how your business gets its price tag: You may be familiar with the “Market Approach” to business valuations which is simple: Earnings x Multiple = Valuation. So if your business earns $1M per year you would multiply $1M by a certain amount (your “multiple”) and that’s your valuation. Multiples tend to vary across industries but they can also vary to a large degree inside the same industry. This is where being a “hands-off” business owner starts to look super appealing.
Buyers love a hands-off business. Here’s why:
From your current perspective – a business operator – “stepping away from the business” can seem taboo (or even impossible). From the buyer’s perspective buying a business that’s too reliant on one person is a big gamble. Think of it this way: Imagine you want to buy a business. You see the numbers and everything looks great. They’re making huge profits, business is good and they have a line out the door of returning buyers who brought their friends. Then you learn the business owner is responsible for:
- Accounts payable
- Accounts receivable
- All sales
- Warranty claims
- Purchasing
- Opening the shop every day
- Closing the shop every day
- All marketing campaigns
- All customer service
- Cleaning the bathrooms
…would you still want to purchase this business? Once you buy the place, who is going to do all of those jobs? You?
In the world of buying and selling businesses, this is called “Key Man Risk”. It means the business is too dependent on one person. When a business relies on the owner for daily operations and customer relationships, potential buyers don’t see themselves as “buying a business”. They see themselves “buying a job” and working 365 days a year. On the flipside, if you build your business to function like a well-oiled machine without you, you attract a much wider pool of potential buyers. This raises demand value and increases the likelihood of a sale. Supply and demand are king. More buyers equal greater demand to purchase your business.
And the more potential buyers, the more money you’re likely to receive once a sale closes.
The Bottom Line: Private equity firms, family offices, and high-net-worth individuals want to buy businesses that operate with minimal involvement from their current owner. Trying to replace an owner who’s doing a huge amount of grunt work or who has irreplaceable knowledge is a nightmare. That’s why buyers will pay a higher multiple to avoid key man risk.
Even if this all makes total sense, if you’re used to being Mr. or Mrs. Fix-It in your business, you’re left with one behemoth question: How do you remove yourself from the day-to-day without everything falling apart? Earlier in the article, I mentioned “letting things break”.
And that’s exactly what you do. But it’s not as radical as it sounds. It’s a process.
Start delegating smaller tasks. Take a day off. Take a week off. Take a vacation. See what breaks.
Then once you get a pulse on the issues that pop up when you’re gone, resist the urge to fix everything yourself. Instead, focus on training your team and setting up systems to prevent these issues in the first place. You need to slowly “fire yourself” from the daily grind.
Removing yourself from the day-to-day doesn’t happen overnight. If you’re thinking about selling, you should start this process at least two years in advance.
The transition from being a key player in the daily operations to being an “absentee owner” doesn’t need to be dramatic. Small changes over a long period of time add up - and if you start the process now you’ll set yourself up for a nice payday when it’s time to sell your business.
So if you’re nodding along and thinking “this makes sense - but I have no idea where to start!” Feel free to shoot me an email with any questions you may have – sean@tws-advisory.com
Or if you know an owner who needs a vacation then do them a favor and pass this article along.