As a business owner, you are likely the most important person for your company’s success. But when you are the hub of your business, it can have negative effects on your business’s value, limit your business exit paths, and in some cases make selling your business impossible.
In this newsletter, we’ll show you why beginning the process of stepping aside before you’re ready to leave is one of the most consequential decisions you can make when planning for your business’s successful future.
You Shouldn’t Do It All
Being in a position where the business cannot survive without you can be perilous for planning for a successful future. But for many business owners, making all the biggest decisions is what got them to this point in the first place. It can be tempting to ask, “Why would I change something that has worked so well?”
One of the most attractive selling points for potential buyers of your business—whether you sell to an outsider, an insider, or a family member—is a business that functions well without you. That’s because businesses that can function well without the owner often have numerous Value Drivers installed that allow it to function without the owner. Some of these most important Value Drivers include the following:
- A next-level management team
- Documented processes that tangibly improve cash flow
- Proven growth strategy
- Diversified customer base
- Sustainable recurring revenue that’s resistant to commoditization
In many cases, installing these important elements not only helps increase your business’s value but also relieves you of some of your duties as a business owner that you may struggle with or not enjoy.
In short, there is no doubt that the business needs you to survive at the beginning. But in order for the business to thrive as it grows, it often cannot rely on one person for its success. Delegating responsibilities to other people and processes, and thereby reducing the business’s reliance on your presence, can both make it more valuable to potential buyers and give you more time to focus on the things you love most about running your business.
Pick Your Path (Or Others Will)
After a long successful business career, you likely expect to be able to choose how you leave the business. After all, you probably spent years or decades having control over your own destiny. But if you don’t position the business to thrive without you, then you may have no say in what should have been the culmination of all your business success: a fulfilling exit.
For example, say that you wanted to eventually transfer your business to a family member. You may train them and give them guidance, but when given opportunities to make decisions, you find that they don’t seem capable of consistently making the right decisions for the business. You often find yourself swooping in to save the day.
You might decide that this family member isn’t the right person to transfer the business to, and then begin looking for a third-party buyer. But if you were still the person making most of the decisions, the third-party buyer may wonder what happens to the business after you leave it.
A big reason why business owners find themselves scrambling as they approach retirement is because they have always made all the big decisions for the business. Even if they make the right decision every single time, the fact that they are the only one that can do it can put them in a tough corner because it forces potential buyers to ask, “If this owner isn’t running the business, will it succeed? If not, what am I paying for?”
In this case, they’d be paying for your presence, which means that if you wanted to sell your business and achieve financial independence, you’d likely need to stay at the business, working for someone else, until it was ready for you to leave it.
This concern is not unique to sales to third parties either. For instance, let’s say that the family member you wanted to transfer the business to was an exceptional leader. They make good decisions, bring new ideas to the table, and express their ambitions of ownership to you. But as time goes on, this family member may feel like your exit timeline isn’t moving quickly enough for them and that they’re doing more than they’re being compensated to do. So, they start their own business or go to a company that will allow them to pursue their ambitions on their timeline.
In this case, the person you wanted to sell to, a trusted insider, decides that the incentives you offered weren’t enough to keep them around. This can put you back at Square 1, but with less time to pivot your plans.
Getting to pick your Exit Path is possible through prudent, preemptive planning. Without a plan for how you will eventually give up control of your business, it can be exceedingly difficult to maintain control over how you exit.
Giving Up Some Control Now for More Control Later
To maintain long-term control over your future, it’s so important to be willing to give up some control in the shorter term.
Even if you don’t intend to exit your business within the next 5, 10, or 20 years, beginning the process of transferring control of your business to next-level managers and documented processes is something that takes time. The good news is that when done properly, delegating responsibilities and control away from yourself can have a stackable effect on how quickly your business can become less reliant on you.
For example, if you were to try to find and hire a next-level management team, create and document every process for the company, all while submitting yourself to the everyday grind of owning a business all by yourself, it would take a very long time. You’re only one person, and you’re also running a business!
But if you were to start by installing a next-level management team in Years 1 and 2, they would be able to begin to help build the processes and documentation that allow the business to thrive whether you’re making the decisions or not. This next-level management team would be able to accomplish more than you could by yourself because not only do they have the expertise but also there’s more than one of them.
This can help position your business to thrive without you, which can give you more options and more flexibility to create plans that allow you to eventually exit the business on your terms. And even if you never intend to leave your business, the elements that position business owners to exit their businesses successfully are elements that make the business run even more effectively even while you are there.
We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.