Could your business run without you?  How valuable are you to the daily operations of your business?  The Less the Better.  This may seem contradictory in light of all that most owners have invested, gambled, and fought through to build their businesses.  Yet this is one of the most important issues that has to be sorted out when figuring out the value of your business to a prospective buyer.  This can be difficult to sort out and often takes some deep thinking and possibly some outside perspective to realize exactly how much of the value of the business is tied to the owner.

The reason this is such a critical issue comes from the view of the potential buyer.  If you as the owner play a critical and possibly irreplaceable role in the daily operation of the business the buyer has to wonder if the business is viable without you.  How much of a “value discount” needs to be placed on your abilities and contributions that will walk out the door when you leave.  No different than you assessing the value in time and energy and money it would take to replace a key person on your management team.  The difference being that when you are replacing that key person you have the advantage of having trained and worked with that person and understand what it will take to replace them.  A new buyer may not have this advantage or understanding and will likely place a heavy discount on what they feel the business is worth without you in it.

There are ways to work through these issues and may bring to the table solutions like some type of a work commitment on the part of the owner for a period of time, sometimes 2 to 5 years.  The new buyer may also insist on some type of an “Earn Out” provision in the purchase agreement.  Typically this will hold back a portion of the purchased price of the business to be paid out over time based on the owner continuing not only to work, but also to achieve certain performance goals in order to be paid the full “Earn Out” amount.  You as a seller may be willing to accept this sort of contingency and it may look very lucrative at the outset as you consider your track record and ability to achieve the desired performance.  Beware, many times it is difficult to know what plans the new owners have moving forward.  It may seem that it would be easy to capture these “Earn out” bonuses but if the focus on the business or direction changes, or resources needed to reach the performance goals are not made available it may prevent you from realizing the bonuses which are in essence a portion of the purchase price you are counting on.  It is critical to have a good attorney help draft or look at any type of earn out agreement (can this point to the section of the site where content on earn out agreements is?) before you sign it to make sure your best interest is considered.

So how do you deal with your value to the business?  The First step: Take an honest assessment of how critical you are in the operations of the business.  The Second step: Minimize it. One exercise I often use when helping owners understand their role is to ask them to draw a picture of their position and involvement in the business process and how the management decisions are made or carried out in the company.  I call it “Where are You on the Page?”.  Think about it.  If you take a piece of paper and you draw a picture of how your business is structured, where do you fit?  Draw in who reports to you, how is the decision making done, who deals with problems, who approves purchases, who develops leads, who approves proposals before they go out, who collects money, who does the hiring, the training, the performance reviews, etc.  The list can go on and on.

What would your picture look like?  Think about it, Draw a picture before continuing.  Where do you fit on the page?  Unfortunately many times the diagram looks a lot like a wagon wheel with the owner at the center of the page and all the key people surrounding them.  The communications, approvals, key functions etc. all go through the owner at the center of a circle and then out to other team members.  Sort of like a wagon wheel with the owner at the center like the hub for the axle.  Have you ever removed the center hub from a wagon wheel?  It isn’t easy and I can tell you it doesn’t end well when you try to continue on with the wheel.  If you would like some help thinking through the key areas to consider when looking at “Where are You are on the Page?” contact me and I will send you a Free worksheet that helps put together and understand your picture.

If you would like some help thinking through the key areas to consider when looking at “Where are You on the Page” contact me and I will send you a Free worksheet that helps guide you through key areas and understand your picture.

This article is in two parts for a reason.  Part one is to help you understand why your value to the organization is important to understand and what it means to the value of your business from the prospective buyers position.

Now go to part two “Owner Value – Less means More -Part 2” to find out how to minimize the “Owner discount” and get the most value for your business.  Link (Owner Value – Less means More – Part 2)

 2 Tim 2:2