Author: BcAdm

Why Owner-Centered Businesses Sell for Less

Successful businesses are not successful solely because of the owners. In my experience, successful businesses have established a culture of performance standards and effective decision-making that enables success.

So, is it appropriate for an owner to view a business that the owner has founded and guided to success as a legacy to the owner? My argument would be that a more appropriate legacy would be the wealth derived from the business rather than the business itself.

The more the business is about an owner, the less it is worth to a prospective buyer. A sophisticated buyer is not looking for a memorial, that buyer is looking for cash flow from a business that performs well and makes good decisions.

A prospective buyer judges a business not by its current owner, but by its employees. Are the employees competent and loyal? Is there a culture of performing well and satisfying clients or customers? Will the selling owner’s absence adversely affect the business?

Consider two businesses with identical revenue. In the first, the owner is the face of the business, the one who closes every deal, answers every difficult customer call, and makes every meaningful decision. Take the owner out for a month, and performance sags. In the second, the owner has spent years pushing decisions down – employees are trusted, trained, and given the authority to act. Take the owner out for a month, and nothing changes. A buyer will pay a premium for the second business and a discount for the first, even though today’s revenue is the same. What is being priced is not this year’s cash flow – it is the risk that the cash flow disappears the moment the owner does.

This is the part owners resist. Building a business and building your name into it is emotionally satisfying. Pride of ownership is real. But pride of ownership and value from ownership pull in opposite directions once a sale is on the horizon. The wise owner is not looking for recognition for performing in the business. The wise owner who wants to derive maximum value from the business will diminish the owner’s role to allow employees to perform and excel. This may not lift the ego, but it will lift the selling price of the business.

Diminishing the owner’s role is not simply a matter of delegating tasks. Handing off work while keeping every decision on your own desk changes nothing – the business is still built around you, just busier. What has to change is decision-making itself: employees need enough information and enough authority to decide things themselves, and a structure for communicating those decisions so the business runs on a process rather than on the owner’s presence. That shift, from an owner who decides everything to a business that makes good decisions without the owner, is the actual work of building a business.

The owner’s name may not be on the sign in front of the business, but it will be on the bank account with the proceeds from the sale of the business.

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For more on building a business that runs and sells without you go to btcllc.net

The three ways business owners lose the value of their businesses are conflict with co-owners, the loss of a critical owner, and failure to prepare for sale.

Owners reading this might be surprised to learn that the threats are preventable.

Most business owners know things could go wrong. What they don’t know is that the right kind of planning removes the existential factor of the threat. Many owners ask, why plan if you cannot predict the future. But if you plan you have practiced decision-making and can make good decisions no matter what happens. With preparation and the right reaction, a business can survive an owner conflict, the death or withdrawal of a critical owner, or the inability to sell the business. This survival is possible when there is an embedded decision-making process that produces and revises business planning as changes (expected and unexpected) occur.

Here’s what I mean.

A co-owner conflict doesn’t start the day someone lawyers up. It starts years earlier, when two owners who assumed they shared the same values discover they do not. One wants to sell in three years. The other wants to build something for the next generation. Neither said it out loud. Three years later, the damage was already done.

The death or disability of a critical owner is similar. Even if there is a buy-sell provision in place, it does nothing about the vacuum the owner leaves behind — the relationships and knowledge unique to that owner.

It is not the plan that enables success, but the process that implements and revises the plan.

The process is as follows. Owners articulate their values with respect to the business to one another. The owners embed a group decision-making process in the business. The decisions from that process create planning that is dynamic, communicating decisions to all levels of the business (Dynamic Planning). The long-term strategic planning results in an owner agreement containing buy-sell provisions that address foreseeable transition events. The short-term planning is based on managing the business so that a sophisticated buyer conducting a diligence investigation will find the business worthy of a high price (Prior Diligence).

Where to go from here

These three threats — no buyer, owner conflict, failure to change — are the subjects I write about every week in Owning a Business on Substack.

Not theory. Frameworks are built from actual transactions, disputes, and turnarounds. A practitioner’s archive on what goes wrong and how to protect against it.

Free subscribers get weekly posts and access to the community chat — including the ability to bring their specific situation to me directly. Paid subscribers unlock the full archive: every framework, every deal breakdown, going back to the beginning.

rickriebesell.substack.com

To ask that every performance be better than the last is to place tremendous pressure on the performer. The aspect of performance is at the heart of most endeavors. Intuitively, we know that performance is not a constant, but in a competitive situation, the goal is for it to improve over a set period of time. It is not enough to ask for consistent effort. When we watch athletic performers, we see that champions have more than just consistent effort; they improve through sound decisions about innovative techniques, effective training, better equipment, and better mental preparation.

In business, performance is the execution of a plan, which is the narrative of the decisions of the business. The cycle is well known: set goals, describe action, set mileposts, take action, evaluate, and revise. Assuming the creation of a quality plan, the quality of performance will depend on the execution of the plan. But initial quality is not enough. Business competitiveness requires consistently high levels of performance with an overall improvement of performance over time. This means that taking action, no matter how excellent the plan or the one-time performance, is not enough. It is not enough to repeat a high-quality performance through consistent effort. To achieve a consistent improvement in performance, the decision-making process of the business documented by the revision of the plan, including the revision of the actions to implement the plan, must be continuous.

If a business creates a plan that is excellent and implements the plan with flawless execution, but performance does not consistently improve, the business will fail in a competitive environment. The part of the planning process that creates success in a competitive environment and that causes performance to consistently improve, is evaluation and revision.

How often do we see businesses taking months to create strategic planning, then finally implementing the plan, only to take months to evaluate and then revise the plan; in essence, taking the same time and resources required to create a new plan. No matter how good the plan, constantly recreating plans and implementing them will not accomplish consistently improving performance.

Consistently improving performance is accomplished through constant evaluation and revision of planning coterminous with experience. Experience and evaluation cause revision, and the revision to the plan should be written. How can evaluation result in coterminous revision of the plan?

The plan starts with the decisions of the policy-making group about strategy. The action plans are implemented by the executive officers. As the action plans are being executed, those charged with executing the action plans will change the plans to accomplish the task. The experience will be evaluated frequently by those from the policy-making group. At the highest level, the policy-making level where strategic planning is adopted, the planning does not have to be revised as much as at the operational level where action plans are being executed. It is at the operational level that the planning is frequently changed, but the changes are not documented. These informal changes are often what accomplishes the action plan, but frequently others in the business, especially those in the policy-making group, do not know about these changes. Frequently that is because those who change the plan are not sure they have the authority to change the plan but the changes are done to accomplish the task.

If the members of the policy-making group do not know about changes to the action plan, their evaluation and further planning will be flawed. Those taking action should be able and required to amend the action plans. In this way, changes are communicated up and down the hierarchy of management. Moreover, changes are occurring with experience, and revisions to the plan are written contemporaneously with the decision to change at the operational level. Those charged with the execution of action should be empowered and required to change the action planning. When this is in place, the plan becomes dynamic – an effective form of communication within the business.

Planning is the communication of the decision-making process of the business. The constant questioning of goals, selection of actions, identification of mileposts, and determining revisions should be a series of seamless, constant activity. It is this activity that will enable consistent improvement of performance over time. In business, we must do more than ask employees for increased effort to accomplish improvement of performance. We must establish a process to make good decisions that are documented in dynamic planning that is constantly evaluated and revised at all levels. That is the essence of championship business performance – continuous improvement in performance over time.

We have all been there. Rearranging the deck chairs on the Titanic. There was always an unspoken vision – never written but certainly desired. But things got in the way. The problem was that so many issues came up. There was never a quiet period when things could be thought out. There was never enough time to do it right. Then there was no time at all, and what we were doing was too little too late.

How many business owners have you been aware of who have never derived full value out of their business? Some owners could not realize their business dreams because of a health issue or burning out. Some owners were forced out by other owners. Most owners fail to realize maximum value from their business simply because no one would buy their business for full value. These owners did not receive full or maximum value from their business because they did not plan, and then all of a sudden, what they were doing was too little too late.

Having an owner agreement with buy-sell provisions protects the value of the interests of owners who cannot be involved in the full cycle of the business. Planning for the sale of a business for maximum value is the way to obtain maximum value for a business interest. But most businesses do not have written plans. Why? Business owners will tell you it is because they never had time to plan, but that is not the reason.

You will not have time to plan if you continually do those tasks which are urgent but not important over those tasks that are important but not urgent. The business owner should prioritize time for creating a written strategy, implementing a plan from that strategy, and revising the plan as it is executed. Not doing that by prioritizing urgent but not important tasks that could be delegated is a form of procrastination – a fear of the difficult tasks involved in the important activity of planning. For a multiple-owner business, the values of the owners should be articulated one to the others and a strategy, like the Prior Diligence strategy, developed from those conversations. This is not easy, and it requires quality time for the owners to communicate. From this strategy, a plan of action through Dynamic Planning should be developed through group decision-making involving all elements of the business. This is also difficult, but it can be accomplished, and it becomes easier as a group decision-making policy becomes embedded in the business. Don’t let the time thief steal your chance to get full value from your business. Learn how at the Owning a Business substack (https://rickriebesell.substack.com/welcome).