This post is part of a series, “How to Boost the Value of Your Business.” You can check out the intro and post index here. As an entrepreneur with frequent bouts of do-it-yourself-itis, the following topic hits close to home.
Key person dependence increases the risk (and lowers the value) of your business.
Many business owners have developed lucrative jobs, but have not developed a transferable business. Transferability of customer relationships, business processes, and a skilled workforce increases the potential value and marketability of a business.
Even if you have no plans to sell your business in the near-term, it pays to put systems in place before you need them. Key owner or manager dependency is not something easily or quickly fixed in most cases. While it can be difficult to let go of control (and entails real risks), the payoff often includes improved results in the short-term and much greater business value in the end.
How do you know if it’s time to sell or start handing over the reins of your business? The New York Times recently posted an article with several good observations, including:
- It’s not fun anymore.
- You’re not inclined to invest in growth.
- You feel your management skills are overmatched.
If you are an owner or a manager making most of the decisions, and your business would collapse without your involvement on a daily basis, you have a dependency problem!
Action Steps
Assuming you want to reduce your key person dependency, following are some steps to take now.
- Schedule a vacation, and then take a longer one. I’ve heard many business owners say how surprised they are to find that their business performs better in their absence! If things fall apart while you’re away, you’ll clearly know what needs fixing.
- Secure the value of your workforce through appropriate employment contracts, such as non-competition and confidentiality agreements. Consider incentive compensation or alternative ownership structures to increase engagement and motivation.
- Evaluate your current team for those who can step up their role through training and mentoring and identify roles that may require hiring new managers who can do their jobs without daily supervision.
- Create a team or non-insider board of directors to hold you accountable for your business objectives.
- Prepare a plan and budget to eliminate the need for personal guarantees in your lending relationships.
- Obtain key person insurance, outline a succession plan, and create a properly funded buy-sell agreement.
- Designate a contingency team to take care of the business in case of your absence, disability, etc. Then, let them start running the business before an emergency hits.
- Make a list of all your business activity or decisions during the past month and assign each task to someone else.
What other ideas or recommendations have you found to be helpful in this area? Do you have any interesting success or disaster stories related to key person dependency in business?
One of the most frequent questions I’m asked is if there are standard multiples to value a business. I’m not aware of a “standard” multiple to value a business, but I can shed light on six things that often influence the value of the businesses we appraise.