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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