Build Business Value: Taking You Out Of The Equation

Eliminating the dependence of a business on its owner is arguably the most important factor in enabling a profitable sale.

If people, systems and processes that enable a business to run independently of its owner in day-to-day operations have not been put in place, potential buyers will find it a risky investment that may not be worth taking up, or only at a highly discounted price.

Putting it bluntly, buyers don’t want a business that is heavily reliant on the owner because it is likely that business will suffer with the departure of that person.

Drivers of Business Value

Potential buyers investigate a range of value drivers and the better the condition they are in the more you can drive up the business’ value and asking price. Two of the top drivers are:

  1. A stable, motivated and competent team of employees (and managers in larger businesses); and
  2. Operating systems that have systemized many of the day-to-day procedures.

These two drivers, human capital and systemized processes, provide a great deal of the comfort factor to a buyer.

1. Human Capital

In early years, you, the owner, are everything. Without your involvement in the business there is no business. As such, the concentration of knowledge lies mainly with you across all the key areas.

As the business gets larger and the scale and scope of its operations widens, you need to find ways to transfer knowledge in key areas to employees – particularly to any management team – so that at selling time the concentration of knowledge has shifted from you to the employees.

Failing to make that shift shackles you to the business. Because if you are its most valuable asset, the business is worth substantially less without you and potential buyers will expect a discount rate to compensate for the loss of that asset at transfer.

Once you have developed the human capital value driver, you will have more room to more actively manage the business. At the same time you have enhanced the value of the business by reducing a buyer’s investment risk.

With key operating and management personnel capable of running the operation, a new owner can make the acquisition and learn the business while the company’s personnel continue to effectively carry out the day-to-day operations. Corporate purchasers generally prefer acquisitions with existing management teams in place.

Working on the HC value driver involves training and development and delegation of responsibility as a basis, but it should go further. The actions you can take can be both positive and defensive.

Positive actions include:

  • Putting in contracts an equity participation scheme for those in key positions or with key skills
  • Clarifying responsibilities and authorities with job role descriptions adds another layer of security that employees will continue to work in an organized manner while the new owner adjusts.

Defensive actions include:

  • Include appropriate non-compete and confidentiality provisions in contracts.
  • Where the businesses owns or develops intellectual property, provisions should be included in the contracts of employment to ensure that all ownership rights vest in the business.

2. Process systemization

Beyond the need to develop human capital, there is a need to assure continuity of operational effectiveness and its associated value driver, profitability.

This means documenting important relationships, special product or services knowledge and procedures for carrying out many of the operations of the business. It’s important to get knowledge about how things work turned into systemized business processes as a basis for sustainable productivity when the owner departs.

The most powerful improvements in productivity come from systemizing processes so that the business performs in the manner of a franchise. Franchises have been an incredibly successful form of business because of their turnkey nature – proven systems and processes within the business are documented and can be used by anyone. Franchisees don’t have to learn everything from scratch for themselves.

Documenting procedures offers the opportunity to rethink and improve them and an operations manual gives a buyer some security that they, or their managers, will have any answers they need to find after they have taken over and are running the business. If a buyer concludes from their due diligence that they are going to have to spend money sorting out the infrastructure it will probably come off the purchase price.

Simple, documented processes that transfer the owner’s skills and remove them from the process ultimately add to the value of the business.

Out with the old …

Taking you out of your business is an essential prerequisite to putting your business up for sale if it is to achieve top value. The better the business can operate without you, the more attractive it will be to a buyer.

The better this can be achieved the more the business will be worth as a saleable asset.

To learn more about business transition and successful exit strategies, ask for ROCG’s free booklet, “This Way Out – A Roadmap to Business Transition”. Visit the website, and look under ‘Publications’ to order your complimentary copy.

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Growing Your Business – Creating Your Core Team 1

Although many small businesses begin with only one or two members of staff – the founders – most growing businesses quickly recognise the need to create a larger team. Not only can this spread the workload but a well-selected team can bring in more energy, creativity, drive and knowledge than the founder alone might possess. A small, closely-knit, highly motivated team can be an unstoppable driving force.

The authors of The Beermat Entrepreneur call the members of this core team ‘cornerstones’. They suggest that the ideal mix is one entrepreneur providing strong leadership, surrounded by four ‘cornerstones’ – one for sale, one for finance, one for product development and one for project delivery and customer service. In real terms, most small businesses cannot afford such a big team, and don’t really need it to begin with. However, even bringing one other person in to the business can make a huge difference to its success during the first year or so.

In many cases, the original team will be composed of the founder, or founders, and one or two relatives or friends who have been roped in along the way. This works well if everyone is committed to the success of the business and prepared to work hard. As we’ve seen the early days of a business are defined by long hours and a painfully demanding workload – there is no room for the half-hearted or unenthusiastic. Not only will they not pull their weight, but they will sap everyone else’s enthusiasm too.

I’ve heard it said ‘never work with friends or relatives’ and it’s true that in some cases this leads to disaster. However, a team who like each other – and have a friendship beyond the business – can also be extremely efficient and powerful.

Jude, Business adviser

Remember that just because you enjoy spending time with someone socially it doesn’t mean you will like working with them. Ask yourself what they would be like to work with. Are they hardworking? Enthusiastic? What do they have to offer your business? Try to find people whose skills compliment yours, who can bring something to the business that fills ‘gaps’. For instance, if you are fantastic on the finances but weak on marketing, you need to find someone who can bring something extra to the marketing side of the business.

A recent London Business School survey of CEOs found that they considered the major factor that had contributed to the success of their businesses was ‘selecting the right people with good attitudes who are loyal to the company and who want to excel in their careers’.

Defining Roles

Whether you decide to go into business with others as equals or you employ them as part of your original team, it is very important to define roles carefully. Everyone needs to know what is expected of them and where the boundaries of their ‘area’ lie. In businesses with two or more equal partners a lack of clarity about roles can be a major source of conflict, taking up valuable time that might be better spent focused on other aspects of the business. If you have a management team, you need to give them space to fulfil their roles and feel that their contribution is valued. This doesn’t mean handing over control, final decisions will still rest with you (or if they don’t you need to be clear about exactly who is the boss – only one person should take this position or squabbling and infighting can result).

Consider the following key roles and divide them between your core team. You should all be clear on who is going to take each role.

Business leader – who takes the final decisions? In other words, the boss.

Sales person – who sells to your customers? Identifies customers and carries out your customer research?

Finance person – who manages the money and the associated administrative work?

Supply management – who locates suppliers, negotiates with them and maintains adequate supply levels.

Core business – who does the core tasks of your business, by which we mean the things that your business is actually about? This might mean making a product, providing a service or something else.

Marketing and PR person – who promotes your business to potential customers and raises the profile of your business?

Some of these roles overlap, so good communication is also of key importance to your business.

Importance of Role Clarification

People do either one of two things in a business – they either add value or they add cost. There are no grey areas.

One of the most important teams to ensure that your core team members are all adding value is to help them clarify their roles.

There are a number of different aspects to role clarification:

Prescribed role – This is what the business uses to set down the individual’s overall goals and objectives. It is usually called a ‘job description’ or something similar and it sets out the person’s responsibilities, authority, and key tasks, as well as their position in the business hierarchy.

While this is a useful starting point, it does not take account of personal differences and changes in circumstances such as growth of the business or the need to cover weak performances by others.

Personalised role – the prescribed role is only part of the picture. These are factors internal to the individual which will affect the way he or she performs in the role.

This includes their abilities, skills and strengths, as well as their expectations of the role, their assumptions (about the role, the business, the sector. etc.), their values and ambitions.

Perceived role – the perceptions and expectations of others in the business will have an impact on the individual. For example, they will have their own views on what the priorities of the role should be as well as the boundaries: ‘I don’t think Sales Managers should…’; ‘I expect you to…’ These can limit or restrict the way a person performs, but if expectations are high and positive they can raise the person’s game, enabling them to perform to their full potential within their current role.