The Risk of Running an Owner Dependent Business
One of the most difficult challenges I've experienced as a business consultant is convincing a successful SMB owner that they are operating an owner dependent business 𝙖𝙣𝙙 it will negatively affect the value of their company when it comes time to sell. Immediately, revenue reports & profitability charts are pulled out. But, they are only looking at their business from their perspective, not from the eyes of an investor. The number one thing that scares off a prospective buyer from acquiring a business is when they discover how reliant the functioning of day-to-day operations are to the current owner.
The risks associated with owner dependent businesses are the following:
• 𝗟𝗶𝗺𝗶𝘁𝗲𝗱 𝗦𝗰𝗮𝗹𝗮𝗯𝗶𝗹𝗶𝘁𝘆. How far can a business expand if decision making revolves around the owner?
• 𝗟𝗼𝘄𝗲𝗿 𝗩𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻. Due to uncertainty of future sales & client relationships, investors will assign a lower value to the business.
• 𝗥𝗲𝗱𝘂𝗰𝗲𝗱 𝗠𝗮𝗿𝗸𝗲𝘁𝗮𝗯𝗶𝗹𝗶𝘁𝘆. Investors view owner dependent businesses as lower quality & less transferable and often move on to other opportunities.
• 𝗨𝗻𝗳𝗮𝘃𝗼𝗿𝗮𝗯𝗹𝗲 𝗗𝗲𝗮𝗹 𝗦𝘁𝗿𝘂𝗰𝘁𝘂𝗿𝗲. If investors decide to move forward they often mitigate risk by structuring deals that are more favorable to them, not the business owner.
So what are a few signs that a business is owner dependent?
• The owner controls key client relationships
• No one knows the company as well as the owner
• Stagnant or declining revenue
No question about it, growing a business is hard. The owner of the business has to play multiple roles throughout the beginning life cycle of the business due to limited resources. But there comes a time when certain success has been achieved that the business will be best served if the owner pulls themselves away from the day-to-day operations and starts building a business that is less dependent on themselves. Not only does this bring a better quality of life to the business owner, it also serves to drive up the value of their business when it comes time to sell.
If you are concerned that you may be operating an owner dependent business with your sales operations & would like to discuss strategies to mitigate this risk, please schedule a free consultation here on my website, or email me at firstname.lastname@example.org