CEOs: What would happen if you went on vacation for a month and left your business to run itself?
If your answer is “everything would fall apart,” or “what’s a vacation?” chances are good that your business is highly dependent on you. This may not seem like a problem now, but when it comes time to think about selling your business, it may well be.
Contrary to popular belief, buyers are highly risk-averse. Owner dependence (or dependence on any key person) is a major driver of risk, and as such can mean sellers don’t get the price or terms they want during a transaction.
If you’re thinking about selling your business, here are a few suggestions to help mitigate the risk of owner dependence.
1.
Make moves well in advance of a desired sale.
Bring in professional management well ahead of a sale so that you go from running the business to being an absentee owner, it adds a lot of value to the business.
2.
Bring in an independent board.
Creating a board is a great way to mitigate risk for a potential buyer by ensuring long-term business continuity. Board members also bring in outside perspectives and experiences that can improve business practices and help owners and existing management identify and address any challenges in the company.
3.
Build out the management team.
A lot of privately held businesses operate without a true CFO, somebody who understands treasury and sophisticated financial reporting. Bringing in a CFO is an easy step that can be done in a short time frame. Bringing in a COO is also an option, although sometimes that can be done concurrently with the sale transaction.
In some cases, the business may not be large enough to justify bringing in either a CFO or a COO. In these cases, work on addressing areas of the business that will directly impact revenue first. Customer relationships and sales are probably the most worrisome areas for a potential buyer. Most buyers will be able to find someone to manage the books and keep the trains running on time. But they want to make sure that they won’t lose revenue. You want to make sure that there’s someone in the company who will be staying and can ensure continuity for key relationships.
4.
Document key information.
Business processes shouldn’t just live in your head. If you go on vacation for four weeks, your team should know how to keep things running and have all the information they need to make informed decisions. Prospective buyers will want to see that these processes are well-documented to make knowledge easier to transfer post-close.
Owner dependence is just one issue in a business, but it’s often tied up with other risks that buyers discover in due diligence — lack of a true management team, a shaky handle on financials, intellectual property concerns, problematic legal agreements with customers or vendors, etc. As a seller, the more you think through these problems and take steps to address them in advance of a sale, the more likely you are to achieve the valuation and terms you’re looking for. Consulting with an investment banker or advisor before you want to bring your market is the first step and can help you evaluate where you are and what areas you should address first. The more a company professionalizes their business and looks internally before a sale, the more interest they’ll get from buyers and the more likely they are ultimately to close a satisfactory deal.
