The Value of Professionally Managed vs. Owner-Operated Companies

Have you built your company so that it can run without you?

Do you understand how your business will be valued when it comes time to sell?

Are payroll and benefit-related expenses running through your income statement recorded at fair market value?

The Most Difficult Challenge

Succession planning is one of the most difficult challenges business owners encounter. Most business owners have difficulty thinking ahead to the day they will eventually transition their company because they are fully engaged in day-to-day operational demands. They find it difficult to acknowledge that someday the time will come to think about letting go of it.

Why It’s Important to Build Your Team

In many cases, business owners manage their companies themselves and do not spend enough time building their teams. While they believe they are saving time and money on staffing and training and think they are ensuring that things get done right, they are also devaluing their companies. Why? Investors will see that once the sale is done and the owner has left the company, there is no one left who has the requisite knowledge base and skills to run the company.

For many business owners, grooming talent and developing future leaders can be challenging. They are accustomed to being in control and refuse to allow employees to make decisions, believing that doing so can lead to mistakes. However, whether you ultimately desire to sell or not, building a solid second tier of management is critical to ensuring your successful exit strategy.

Get Off The Company Organization Chart

Potential buyers and investors will view your business as a product, so it’s crucial to change your perspective.

You’ve worked in your business for many years. As a result, you may view your business as similar to a child, evolving from a startup to the mature, successful business you own today. Now is the time to focus on working on the business and above the day-to-day operations. Think of it as promoting yourself from CEO to Chairman.

If you need additional motivation, know that professionally managed companies typically experience a valuation bump compared to owner-operated companies at the time of sale.

Build The Value of Your Team

Employee value is critical to investors. They want to know that you have an experienced, talented team that will continue operating your company profitably after your departure.

This doesn’t only refer to the senior management team. Perceptive investors look beyond the top rungs for a bench of strong, enthusiastic employees who can independently get the work done without the owner’s presence.

A company with long-tenured, talented employees who have demonstrated past success is a positive quality. By contrast, high turnover relative to the specific industry usually indicates something is amiss that warrants further exploration. Red flags might include a lack of institutional knowledge from too many employee departures, quality or schedule slippage in product development, workflow, and execution, and negative cultural issues surrounding the workplace that caused people to leave.

With the above in mind, no investor wants a scenario in which hordes of employees resign after an acquisition. This would mean facing even more challenges to sustain the business, not to mention time and money spent on recruitment and training to fill those valuable positions.

 

The effective succession of your business should begin long before your actual exit. Early and thorough planning helps optimize your company’s value and allows you time to prepare – to form a strategy, build your team, and manage the process. The decisions you make on these issues will determine whether your business will survive after you leave your company.