For many business owners, their company represents much more than a source of income. It may also be their largest asset, a significant source of their net worth, and an important part of their retirement plan. While owners often have a good sense of profitability, fewer have a clear understanding of what the business might actually be worth to someone else.
One of the most useful ways to think about that value is to ask a simple question: What is your business worth without you?
A prospective buyer isn’t only purchasing revenue and profits. They’re purchasing the expectation that those revenue and profits will continue after the current owner leaves. If customer relationships, employee decisions, new business, and day-to-day operations all depend heavily on you, that can create uncertainty for a buyer. A company capable of operating successfully without its owner is more transferable and more attractive.
Assess Your Business’s Dependence on You
Consider what would happen if you unexpectedly stepped away from the business for six months. Would your management team know what to do? Would customers continue receiving the same level of service? Would your largest customers stay? Would new business continue coming in? Could important decisions be made without you?
For many successful entrepreneurs, the answers reveal just how involved they remain in nearly every part of the company. That’s understandable. You may have spent decades developing customer relationships, hiring employees, solving problems, and making important decisions. Your willingness to take responsibility for all of those things may be a major reason the business succeeded in the first place.
Eventually, however, that dependence can become a potential weakness. If the business can’t function effectively without you, a future owner has to consider what happens when your relationships, knowledge, leadership, and sales ability walk out the door with you.
Look Beyond Revenue and Profits
Imagine two companies with similar revenue, profitability, and growth rates. At the first company, the owner maintains most of the important customer relationships, generates a large percentage of new business, approves major decisions, and holds much of the company’s institutional knowledge. At the second, customer relationships are spread throughout the organization, an experienced management team handles day-to-day decisions, important processes are documented, and new business comes from several sources.
Their financial statements may look similar, but their value to a prospective buyer could be very different. A buyer isn’t simply considering what each company earned last year. The buyer is trying to determine how likely those earnings are to continue under new ownership.
Make Yourself Less Essential
For entrepreneurs who have spent years making themselves indispensable, deliberately becoming less essential can feel counterintuitive. Yet that may be exactly what a more transferable business requires.
The process might include developing your leadership team, delegating important responsibilities, documenting key processes, diversifying customer relationships, building more predictable sources of revenue, and creating a business development process that doesn’t rely exclusively on the owner’s personal network.
The objective isn’t to become uninvolved in your company. It’s to create an organization whose success doesn’t require your involvement in every important decision or relationship. Doing so may have benefits well before an eventual sale, including giving you more flexibility in how you spend your time and reducing the disruption caused by an unexpected absence.
Connect Business Value to Your Financial Plan
The value of the business becomes particularly important when it represents a significant portion of your personal net worth. If your retirement plan assumes you’ll eventually sell the business for a certain amount, that value isn’t just a business question. It’s also an important financial planning assumption.
A professional valuation can provide a more objective starting point, while your financial advisor, tax professional, attorney, and other members of your advisory team can help you consider how a future transition fits into your broader financial picture.
You may be years away from selling your business and may not yet know whether the eventual transition will involve an outside buyer, employees, family members, or another path. That’s precisely why these questions are worth considering now. The more time you have to build a company that can succeed without you and understand how its value fits into your financial plan, the more options you may have when the time eventually comes to step away.
Content created by Oechsli.
