Photo by Zainul Yasni
Most businesses in America start the same way. The expert technician turns business owner and their dreams start to take focus.
However, to create real wealth in your business you’ll have to move beyond being the technician and transition to a true CEO. That means focusing your energy on building a sustainable company that doesn’t rely on you for most decisions and interacting with every customer. You’ll need capable managers that work for you to accomplish this. They need to be enabled with the power to fix problems and allocate company resources as needed.
Why does infrastructure build company value?
Potential buyers for your company are looking for a proven system of delivering a service or making a product. It doesn’t mean your business has to be perfect, but it does mean you have to demonstrate how you find, fulfill, and replicate customers. If that process is solely or even largely dependent on your personal efforts, you should get a management team in place that can take some of the load off yourself and build value in your company at the same time.
Alan Austin, owner of Mt. Vista Capital, explains “Buyers are looking for a machine that consistently generates cash flow. If the business is overly reliant on the owner’s input to make this happen, the value of the business is severely diminished. It can even make the business unsellable.” He calls it the “Keyman discount”
“The less important you are to the day-to-day operation of your business, the more it’s worth” – Alan Austin
Building a company in this way is certainly a challenge that not all owners will be able to overcome, but Austin suggests starting with a clean sheet of paper and diagram how the ideal management structure should look. The organizational chart should have the business owner at the top followed by management-level positions that would be responsible for making operational decisions. You may or may not have these people in your organization already, but it becomes a good roadmap for the future.
Being able to show buyers how you are structured, or at least the structure you are working on, goes a long way in reducing buyer anxiety and their fear of the risks that comes along with a big business acquisition.
“Building a management team is also good for your mental health” adds Austin. “Most business owners are comfortable working 50+ hours per week in the beginning and making sacrifices, but pushing off family vacations and missing important milestones with your kids takes a toll. Unfortunately, I have seen many business owners ignore the warning signs and continue on the same path until they reach burnout – and that’s not good for anybody.”
Yes, it takes resources of time and money to pay fair management salaries, but doing this also brings you stability, continuity, peace of mind, and family security. To build life-changing wealth, you need to move beyond owning your own job and hire a team, so you will own a business.
A succession plan means options
It’s never too late to establish a succession plan. Part of the services a consulting firm like Mt. Vista Capital provides is helping the owner plan for the day they walk out the door for the last time. “It’s something every business owner at every level should think about – regardless of how long they have been in business.” Austin makes the logical point, “How can we work toward the goal if we don’t know what it is?“ The fact is, every owner will exit their business someday. The only question that remains is, will it be on their terms?”
Having a strong management team in place or grooming key subordinates to fill these roles in the future gives the owner options. And what it really does is mitigate risk for a potential buyer. Whether your buyer is another company or even your employees, a strong management team ensures that the business will continue to operate. Buyers want assurances that the business will thrive like it has in the past and for the foreseeable future. Key business metrics like cash flow and customer retention should be ideally unaffected when the owner sells the business and walks away.
Risk and money
In capital markets, there is an inverse relationship between risk and value. Austin explains that the more perceived risk there is to buying a company, the more conservative the buyer will be with their offer because they are trying to guard against the unknown. Conversely, you can expect a company to sell for top dollar with multiple offers when these factors are present.
- Company is in a booming industry with a great outlook
- The management team is servicing a diverse, long term loyal customer base
- Multiple vendors mean little chance for business interruption
- Financial records are clear and accurate
- Has an absentee owner
Buyers always balance risk and value. And of course, lower risk means higher value.