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“Many business owners are delaying the sale of their business, because the ongoing economic downturn” / Mark Simmons

by on October 31, 2012 in Lead story, Small Business, Startups

Mark Simmons, MD  of Baldwins & Simmons Business Solutions Ltd writes

Owners are damaging the value of their business

There is growing evidence that many business owners are delaying the sale of their business, because the ongoing economic downturn has depressed the sale value they are likely to achieve.

Whilst many are hoping for a return to pre-2008 levels, few realise there is one other major factor affecting the value of their business that cannot be blamed on the recession. The owner.

Standing too close

If we look at the role of the owner-manager or key staff members in detail, we generally find that if they are unable to work for an extended period, the consequences for the business can be serious. In most situations it is highly unlikely the business would continue to run smoothly, or be able to pursue the same growth path.

In the absence of key individuals, even those that are planned for, businesses generally run smoothly for a short time but quickly begin to deteriorate once the vision and guiding influence is no longer present. It is simple for business owners to evaluate how dependent their business is on their continuing presence, by considering the following questions:

  • Do you feel that most issues end up on your desk?
  • Do you feel that nothing happens unless you are involved in everything?

If the answer to these questions is yes, it is obvious that any absence of the business owner-manager will result in problems for the business.

Does this affect the value of a business?

The degree to which a business relies on the owner or a key individual for success, will ultimately affect the value of that business when it comes time to sell.

For example, let us assume a typical profit-based valuation for a business indicates a value of £2m could expect to be realized on its sale. Along comes an interested buyer, who is seeking a well-run organisation that will continue to operate successfully after purchase. The buyer wants a business that can be easily integrated with their existing operation and completes the necessary due diligence process. However, when the offer comes, it is significantly less than expected. Why the big difference in valuations?

The owner is the problem

The majority of businesses are directly managed by their owners. The success of these businesses is based on the vision, the insight, the hard work and often sheer bloody mindedness of the owner.

Unfortunately, many owner-directors feel that no-one working in the business cares as much about the business as they do. Owners feel that things will go wrong, if they are not ultimately responsible for every decision, or solve every problem.

Any potential buyer will undoubtedly identify the degree to which the business relies on the owner for its success and will reduce their own valuation of the business. This lower valuation recognizes the increased risk of purchasing the business and trying to maintaining its success without the key driving influence as part of its future. The lower valuation also recognizes the expectation of the greater cost involved in successfully integrating the business with their own.

In the worst cases, where the business relies too heavily on the input of the owner, the buyer is likely to walk away from the deal entirely.

Is there a solution?

Unfortunately there is no single step to guarantee a queue of buyers prepared to pay the asking price. It is a combination of factors.

To generate a sustainable, profitable and valuable business, the owner-director needs to take a more strategic, hands-off approach to their business. Or employ someone who will.

Emphasis must be placed on the 3 P’s; product; people; process. It doesn’t matter which industry or sector a business operates in, the rules remain the same. Regardless of the type of customer the business serves, or the complexity of doing business in that sector, each business must address the 3 P’s to ensure success.

If the answer to one or both of the questions posed earlier was in the affirmative, then some simple questions can help define the solution:

  • Do the employees really know what is expected of them?
  • Do they know what to do and when to do it?
  • Do customers consistently complain about the same things?
  • Are projects consistently delivering less than expected?

Looking at the sale process from the buyer’s perspective, it is easy to understand the lower valuations being offered. Anyone buying a business wants to be sure that it will continue to operate once the owner has relinquished control or left the business completely.

A common scenario is for the owner to remain within the purchased business to smooth the transition of ownership or integration, but often this proves difficult for the ex-owner to come to terms with and can lead to an earlier than expected exit.

Clearly it is in the interests of all business owners, whether they wish to sell now or in the near future, to take steps to reduce the dependency of the business on any single individual. And that includes the owner.

So let’s take a closer look at the 3 P’s.

The process

The processes a business has, or puts in place can make a significant difference to its fortunes. Too often processes are built up piecemeal, with time and circumstances distorting them from their original purpose.  Ask an employee why they do things in the way they do them and commonly they will say; “I don’t know, it’s just the way I was shown”, or “We’ve always done it this way.”

Over time, processes can become overly complex; often self-serving for the staff and missing the magic ingredient of adding value to the product or service the business is selling to its customers.

The product

Compelling products and services create business success and thus value. A business must not only create products and services that are right for the market at the right time, but deliver them in the appropriate way – a renewed focus on the client experience becomes critical. However, the ability of a business to create a compelling product or service and deliver an engaging client experience comes back to the people involved.

Unfortunately, in an owner-managed business, the responsibility for growth and the development of products and services often remains with the business owner, creating even further dependence on their abilities. The owner usually has a strong understanding of the market and the requirements of clients, but may fail to keep up to date and become stubborn to necessary change.

Any potential buyer will want to see a process for innovation, for identifying opportunities and ultimately for growth and greater profitability that is not totally reliant on the owner.

The people

In almost every situation, the success of a business is underpinned by the people that work in it. It is the sum of the individual relationships and outcomes that generates the trust necessary for the business to thrive.

Earlier in this article, business owners were asked to assess their level of involvement for their business to operate successfully, with many no doubt discovering they are far too involved. Further questions were posed to help identify a solution and these ultimately revolved around people within the business, their ability to know the right things to do and to do them consistently.

Businesses are purchased for many reasons; to reduce the competition, to buy in expertise and to buy turnover, to name but a few. Normally the people within the business play a major part in its value and when they are regarded as a true asset of the business and treated accordingly, they will respond in ways that will surprise everyone. Their full involvement, working within a clear framework will allow the business owner to take on the leadership role vital for generating business success and subsequent value.

Step back and take it all in

With the pressure on, business owners find it can be difficult to step back and take an objective view of the 3 P’s; product; people; process. More often than not, an owner knows that something needs to be done but has no idea where to start, procrastinates instead and falls into the trap of doing nothing.

Seeking the advice of someone from outside the business, who can take a more objective, ‘big picture’ view can help overcome many of these difficulties, but the individual offering advice must have direct experience and a good track record of successfully implementing change.

Throughout it all, the owner must also be ready to hear how it really is. And be prepared to listen, pay attention and act. Or it could cost them a lot of business value if they don’t.

 

A bit about the author:

Mark is director of Baldwins & Simmons Business Solutions, a consulting services company helping organisations ranging in size from start-ups to multi-nationals, to effectively identify and implement the changes required to achieve their vision.

He is experienced in the full lifecycle of business, working seamlessly with other professional advisers, banks and venture capital companies to deliver the desired outcome.

Recent assignments include acting as interim MD to turnaround a failing specialist construction business, providing strategic management advice to the MD of a pharmacy group and completing a feasibility study into document management and electronic trading for a NASDAQ quoted business.

Mark has a particular interest in strategic growth generated from his experience through financial and IT board positions, operational senior management roles and over 10 years’ experience advising business owners and senior management in a consultancy capacity.

 

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