You’ve heard the term working on the business versus working in the business, or, said another way, moving into a business owner role versus a business operator. The business operator handles all the day-to-day operations while the business owner works outside of the business on its growth and vision.
To increase the multiple of your business sale from a qualitative perspective, we want to move into the business owner role, and away from the operator role. It’s likely you’ve heard this concept before, but you may have had a hard time making it happen.
So, how does elevating and delegating in your business drive value? Most importantly, it increases your buyer pool. If you are working in your business doing very specific items like performing surgery, selling to clients, or preparing tax returns…or any other activity that requires specific industry knowledge in your business, that creates a hole when you leave. It means that a buyer either needs to have the same skillset as you, which narrows the buyer pool, or someone needs to be hired to replace you, which reduces the SDE and therefore the value of the business.
However, when you are in the owner role, you are dealing with managing people, directing the vision and strategy of the business, and overseeing financial performance. These are all very generic business skills and functions — some do it better than others — but these can be traded across industries, which allows a wider range of buyers.
It also allows the buyer to focus on growing the business further while reducing the risk of the business suffering after losing the owner/founder. We call these businesses owner absentee or semi-owner absentee and they receive premium sale prices.
Owner absentee businesses are businesses in which the owner needs to spend virtually no time operating the business – typically 5 hours a week or less. In semi-owner absentee businesses, the owner spends about 10-15 hours per week in operations.
Removing Yourself from General Operations
There are areas where you can remove yourself from operations that will make a larger impact than others. There are three areas of the business to do this: customers, vendors, and employees.
Overall, you are striving towards building a middle management layer where your staff is handling the day-to-day operations including the management of people, rather than you. Customer-facing activities include sales, production, and customer service.
Are your customers doing business with you or your company? If customers are doing business with you, it increases the risk in transition that those customers will go elsewhere to fulfill their needs. This is a huge risk in small business sales and one of the main reasons that companies either don’t sell or sell for a reduced price.
A great example of this is in CPA practices. Many CPAs are practicing accountants and do all-in-one service for their customers: they sell them to become a client, service their
account throughout the year and prepare their taxes. The relationship is between Mr. CPA and Ms. Client, but for the most success, the relationship should be between Ms. Client and ZZZ Accounting Practice. Doing so reduces the risk when the company sells that Ms. Client (and others) will leave, causing a revenue drop.
The fewer interactions clients have with you, especially in the first part of the sales process, the more stable the company is for a new owner.
Removing Yourself from Vendor Operations
Vendor-facing activities include negotiation and maintenance of key vendor relationships. This may not be as important in a service-based business or a business where vendors are easily replaced but can make a large impact on others.
Many product-based companies have a key relationship with their manufacturers and suppliers where the product cannot be produced at the same quality or price by a different vendor. As we addressed in legal deal-killers, the right assignable agreement between your vendor and your company can save a deal.
The relationship with the vendor should also not be dependent on the owner. Begin to make adjustments here, especially if you are in a product-based company.
Removing Yourself from Employee Operations
Finally, employee-facing activities are anything related to employee management. Change creates uncertainty and uncertainty in employees means they will look to transition elsewhere, especially if they are working in your business because of you.
The more employee relationships you can delegate towards middle management, the greater protection the company has in retaining employees after the transition.
But removing yourself from management protects the business from a mass exodus after your departure and should be a priority.