Creating a Transferable Business Is my company too dependent on me? By Mel B. Bannon Author’s Note: This is the first of a series of articles on “Creating a Transferable Business.” In this article, we try to help owners understand why they should measure and manage the degree to which their company is dependent upon their individual efforts. We refer to this measure as the “Owner Dependence Score.”
majority of private businesses are highly dependent upon an owner’s individual efforts in order to run efficiently. However, many owners want to be more independent of their businesses. Most owners also understand that if they are a critical part of each major part of their business, then it is going to be very difficult to grow the business and/or to have the business transition to a new owner. And, as a result of not having a transferable business, owners stand to lose much of the value that they have created in their companies.
Owner Dependence is a Significant Issue Privately-held businesses are often centered on the owners who build them. These owners are not only active participants in the company, they also hold onto critical decisions-making processes in the business. As a result, if/when the owner is not available to continue working in their business, the business suffers, and in some cases fails, with their absence. The logical extension of this process is that the businesses with a high level of owner dependence can be very difficult to transfer to another owner and the company is at a very high risk of quickly losing value. It is also important to note that for most owners, their business is the biggest part of their wealth. If they cannot transfer the value of that business to someone else, they may lose millions of dollars in wealth. Key Management— A Path Forward Another reason for understanding your Owner Dependence Score is to provide better guidance to your key managers as to the future of the company. Many baby boomer owners have managers in their mid-forties and early fifties who are committed to the owner’s company but are also asking about the future of the business and its ownership. They want to know about their careers and where their futures lie in regards to the succession planning for the company. Successful owners engage these managers in meaningful conversations about the running of their companies, but 72
not all owners do so with the future in mind. Nor are they able to focus those conversations on the owner reducing the company’s dependence on them individually so that the business will continue without them. Knowing your Owner Dependence Score in advance of succession planning will help set the stage for engaging key management members in these important discussions.
Contingency Planning— Peace of Mind for Your Family Many owners who have companies with high levels of dependence leave messes behind when those owners can no longer run their companies due to age, sickness, or some other form of disability or death. When you know your Owner Dependence Score, including the specific areas where you need to focus on building or delegating certain jobs, you are in a position to protect your largest asset—your business—and avoid the situation where a mess is left behind for other, less qualified family members to deal with. Measuring and Managing Owner Dependence Leads to Better Growth and Value Many owners of privately-held businesses often think that growing their company and making it more valuable will translate into receiving a higher value at the time of transfer. Unfortunately this is not always true—there are many factors that affect the successful transfer of a business which go beyond cash flow. One factor is the level of dependence the business has on an owner. A potential buyer or future owner likely will not want to purchase a business that, although may have a high value, is too dependent on the owner. So if a business is too dependent on the owner, it may be a lot harder for you to transfer your business. Alternatively, you may be looking at a structure for a transaction that holds back a lot of the value until the business proves to be able to run successfully without you. Creating a Transferable Business
There are many ways that you can grow your business and make it more transfer-
able to a future owner. The first step is to measure your owner dependence and determine your Owner Dependence Score. Following that, your next steps will be to work with your key managers, understand who potential buyers might be, then figure out how to increase the value of your company to make it worth more at the time of your ultimate exit. The Creating a Transferable Business model was designed to assist owners with this process, beginning with measuring and managing owner dependence.
Knowing your company’s dependence on you is an important factor that will assist you in growing your company, as well as impact the future transfer of your business. The more dependent the business, the slower it will grow and the less transferable it will likely be. If you know how dependent the business is on you early on, including the specific areas that you can improve upon, you will be able to create a plan that will help you to move away from the business at some point and create a transferable business. R Mel B. Bannon, CLU, ChFC, RFC, is a registered representative of Lincoln Financial Advisors, a broker/ dealer, member SIPC, and offers investment advisory service through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor, 31111 Agoura Rd., Ste. 200, Westlake Village, CA 91361 (818) 540-6967 or 1500 W. 33rd Ave., Anchorage, AK 99503 (907) 522-1194. Insurance offered through Lincoln affiliates and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances.
Alaska Business Monthly | March 2016www.akbizmag.com
Published on Mar 1, 2016
Published on Mar 1, 2016
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