Shareholders

Unfortunately, indispensable owners can lead to difficult-to-sell businesses. However, there are ways that owners can make the transition as smooth as possible when it comes to partners and other shareholders. 

Roles and Dependencies

If you own a business, your best bet is to make it easy for a successor to replace you. The more valuable you are to your business, the less valuable your business will be to buyers. The ideal situation is one in which you’re 100% replaceable. Unfortunately, many business owners end up making themselves irreplaceable. And in doing so, they not only decrease the value of their business, but also make it much harder to find a buyer when it comes time to sell.

Absentee-owned businesses are worth much more than owner-operated businesses because there’s no need to replace the captain of the ship. Most absentee-owned businesses are successfully run by a team of core employees or a management team. If it’s reasonable to assume the employees will stay after the sale, nearly anyone is qualified to purchase the business from an operational or investment standpoint.

As you streamline your business and make yourself replaceable, you’ll build a business that’s much easier to sell. To streamline your business, you must:

  • Assemble a strong team of core employees and an independent management team.
  • Build systems into your business and document your operations.
  • Automate processes in your business using technology or other systems.

These methods of streamlining your business involve using either human talent or technology. But don’t make the mistake of trying to rely solely on either people or technology. Most businesses must use both.

Don’t make it difficult for a successor to replace you. The more valuable you are to the business, the less valuable your business will be to potential buyers.

Compensation

If your business has more than one owner, compensation must be normalized to market rates for all owners. When normalizing your financials, you should only add back one full-time owner’s compensation. You should pay all other active owners a market-rate salary based on their level of involvement in the business. This simplifies the process of calculating a replacement cost for any owners.

Emotions

If you have owned your business for a long time, you’re likely to have a high emotional investment in your company, especially if you built it from scratch. If this is the case, I recommend you address the emotional elements of the sale well before you begin the sales process. It’s also helpful if you have a compelling hobby or passion to engage in after the sale. Selling a business can be a demanding and emotionally draining process, so it’s best to be as emotionally prepared as possible.

Partners

Seek the approval of all shareholders, partners, and decision-makers involved in your business well before you begin the sales process. Consider whether everyone agrees with the time frame, the price, and other key terms.

Don’t underestimate the rights, power, and potential wrath of minority shareholders, whether voting or non-voting. Minority owners treated with disrespect can exercise their rights and powers and make things difficult for everyone involved. They can hire a lawyer and sue the company, causing considerable harm, even if they don’t win in court. The more-powerful shareholders are best advised to treat the less-powerful ones as they wish to be treated themselves. Ensure you have agreement from minority shareholders before moving forward. Consult with an attorney if you don’t.

You should also seek the approval of your spouse. Under community property laws, a spouse may contest the sale, even if they aren’t an owner of the business, as they may be able to claim that your ownership in the business is community property.

Action Steps

  • Roles: Reduce your business’s dependence on you by:
    • Assembling a strong team of core employees and an independent management team.
    • Building systems into your business and documenting your operations.
    • Automating processes in your business using technology or other systems.
  • Compensation: If your business has more than one owner, normalize compensation to market rates for all owners. 
  • Emotions: If you have owned your business for a long time, address the emotional elements of the sale well before you begin the process.
  • Partners: Seek the approval of all shareholders, partners, and decision-makers involved in your business. Consider whether everyone agrees with the time frame, the price, and other key terms.

Conclusion

As mentioned in the introduction, there are only two ways to directly increase the value of your business:

  1. Increase EBITDA: This can be accomplished by reducing expenses or boosting revenue.
  2. Increase the Multiple: Multiples are based on two factors – risk and return. Take steps to reduce risks associated with your business and improve its perceived growth potential.

There are many areas in which you can indirectly create value, including:

  • Business Model: The easier it is for a buyer to replicate what your business has to offer, the lower the price they’ll be willing to pay. By creating a business that’s difficult to replicate, you’re guaranteed to receive more for it.
  • Financial Metrics: Two words – cash flow. Focus on maximizing cash flow over other value drivers.
  • Growth Plan: Develop an outline highlighting the major ways you can grow your business. Begin executing your growth plan before you put your business on the market.
  • Operations: Take the time you need to ensure your operations are running as smoothly as possible. This minimizes risk for the buyer.
  • Customers: Reduce customer concentration. Ensure customer contracts are assignable in the event of a sale. 
  • Legal: Have your attorney identify any legal issues that need to be rectified before you begin the sales process. Legal issues generally don’t present an opportunity to create value, but they do present an opportunity to reduce perceived risk for the buyer. 
  • Staff: Nearly every buyer will be concerned with the quality of your staff. Make sure there are minimal employee issues that can deter a buyer. Focus on building a strong management team with evenly distributed responsibilities. 
  • Ownership: Make it easy for a successor to replace you. Don’t come across as being personally indispensable to the success of the company.

To download an editable spreadsheet version of this checklist or to learn more about buying, selling, valuing a business, or dozens of other topics related to mergers and acquisitions, visit the Resources section of the Morgan & Westfield website at morganandwestfield.com/resources .