As
a business owner, one of the best ways you can add value to your
business is by working yourself out of it. Develop key employees
and build up a strong management team who will continue to lead the
company after a sale. To a buyer, this signals less risk and helps
ensure they are getting a business that will continue to be
successful after you’re gone.
I’m
working with a company out west right now that fell down in this
one critical area. They are nationally known, with the premier
brand in their niche. They have a well-maintained and modern facility
with stable sales and normalized EBITA for the last several years.
There are no customer concentration issues.
Basically,
it checks all the boxes you’d want checked-except one pivotal
person holds all the knowledge, all the customer relationships, and
all the supplier relationships. He’s in his mid-70s and has been
leading this business for 40 years.
It’s
time for him to retire and relax, but running this business is all
he’s ever known and he’s having a hard time giving up control.
Multiple buyers have talked about him as a "single point of
failure," offering less than what I would expect for a company
like this.
Some
back story: This critical person is, in fact, an employee-a
consultant, technically. He’s the former owner of the business. He
sold the business several years ago to a holding company whose
chairman fell in love with the nature of the business and its high
margins.
But
as new owners, they didn’t have anyone in their business who knew
how to run the operation. They kept the former business owner
without bringing in new management. The former owner continued on,
in the leadership role he enjoyed, hording relationships and
information and badgering anyone who suggested a change.
Unfortunately,
this holding company didn’t take the time to replace the former
owner. Ideally, they would have added a plant operations manager
and a new chief sales officer, investing in some dynamic talent
with strong backbones. That would have been the best thing for the
business long-term, even if they had to take a temporary hit in
sales in the process.
Now
they’re trying to sell this business-one that was never a good fit
for their operation to begin with-and buyers are expressing valid
concerns about the leadership risk. We’ve had four legitimate
offers, and other verbal interest, but everyone is structuring
caveats and clauses dependent on this consultant’s ongoing
involvement and cooperation.
The
takeaway is that one all-knowing, all-powerful person is bad for
business value. Whether that key person is you, the owner, or your
most valuable employee, one key holder of relationships and
information represents risk and ultimately reduces your reward.
Buyers
will not pay a premium if the business is dependent on one person
for success. In fact, they may not buy at all.
Delegate
responsibility to employees and involve them in the decision-making
process. Provide cross-training and ensure your key people are
sharing information and mentoring others.
Moreover,
look to your next generation of leaders. We’re seeing related risk
concerns in businesses with strong management teams where all the
company leaders are slated to retire in just a few years. Spend
time building up your second-tier leadership.
Put
together a program now to help you do that. Succession planning and
leadership development is an investment, but it will make your
company more valuable and salable.
