Want to increase the value of your business to potential buyers? Make yourself dispensable by building a strong management team that collectively is knowledgeable about every facet of the company.
You are probably saying to yourself, “easier said than done.” Understandably so — it is nearly impossible for an entrepreneur not to be ingrained in every facet of their business, from facilitating sales to cultivating and maintaining client relationships, to overseeing marketing and finance, to being active in operations. The nature of an entrepreneur means that they are, by default, at the heart of the business. However, for owners considering an eventual exit, or who are currently preparing their company for sale, it is paramount that they assume more of a leadership and coaching role rather than being central to every decision, however small. Put simply, to achieve top value for the company, the owner should consider surrounding themselves with a strong management team, providing strategic guidance and leadership, letting them do their jobs, and holding them accountable for the results. More on this below.
In the same vein, working on the business together with a strong management team will drive business value.
Buyers typically (but not always) want to purchase the business and its management team, not the owner per se.
A business has a perpetual life, provides a product or service, and transcends the owner. The core value should be attached to the business, not the owner. In other words, a business that is overly dependent on the owner, or any key employee, will likely be less valuable to buyers. Stated rather indelicately, if the owner were hit by a bus, how long would the company survive?
One of the first questions a buyer will ask (besides why is the company for sale) is, what is the owner’s day-to-day role? The importance of an active owner’s answer depends on how long the owner wants to remain with the company post transaction. The importance of the owner’s preference to i) remain with the company indefinitely, ii) remain for a finite period of time, or iii) leave immediately after the transaction closes is dependent on the depth of the management team and will impact the perceived value of and the offer for the company. The perceived value of the company will be the highest if the owner desires to remain with the company indefinitely and the company has a strong management team. Conversely, the perceived value of the company will be the lowest if the owner wants to leave the company immediately and the company has a weak/no management team. Of course, if the owner is not active in the business, then the scrutiny shifts to the strength of the management team.
That said, the owner’s ability to make themselves dispensable comes down to the culture of their business. Most entrepreneurs’ default setting is to be involved in key decisions, while moving quickly and efficiently by doing much of the work themselves.
However, to reiterate, a culture where the owner must approve all decisions and processes is problematic when the owner is ready to sell their company because they have, ostensibly, done the opposite of making themselves dispensable.
As noted above, one way for owners to work on their business rather than in their business is to surround themselves with a management team and employees that they trust.
Many successful business owners also adhere to the adage of surrounding themselves with a management team that is smarter than they are. Owners should empower their management team to make decisions, even if they make mistakes. It is important to create a company culture where the management team has both the responsibility and the authority to make decisions and implement them. Of course, it can be challenging for an entrepreneur to let go of the control, particularly if the manager does the task differently than the owner, but at the end of the day, if the result is the same, then does it really make a difference? And once again, owners who have fostered a culture of autonomy, trust, empowerment and accountability among their managers can expect to receive a higher valuation for their company.
Owners cannot make themselves dispensable overnight. It is a gradual process that must be set in motion long before they plan to sell their company. It may not be easy, but it is a process that will be well-rewarded when the owner decides to sell their company and the resulting transaction meets the owner’s valuation expectations.
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