One of the key drivers of business value is the ability of a new owner to come in and build from where the old owner left off. Normally, the easier the transition, the higher the multiple of earnings the business values at. Everything else being equal, a business that can be run by management or even without owner involvement would have a higher multiple than, say, a single practitioner. For example, A business owner who does most everything himself may sell for a multiple of less than one times earnings, while an operation with a service staff and administrative support could sell for a multiple of 2 to 3 times earnings. This boils down to risk. The more reliant the business is on one person, the greater the risk. The more spread out the duties and responsibilities of running the business, the less the risk. Spread the work around to others, and increase business value through delegation.
Delegation requires a change in mindset as well as in management style. Closely held businesses often fail due to the belief that to do it right, you have to do it yourself. This short-sighted behavior comes at the high cost of low employee morale, high turnover and, in the end, a lower sales value for your company.
Delegating responsibility is responsible succession planning. The easier it is for someone to come in and take over the business, the smoother the sales process and higher the value. If someone believes that the business can’t run without them, how would a prospective buyer take that information? Part of managing the sale of your business is preparing for a smooth transition to a new owner. You can increase business value through delegation of tasks that you had been reluctant to give to others. Make yourself replaceable, and make more money!
Steve Barnett has broad-based experience in small to middle market advisory activities. Prior to becoming a Business Broker, he served as CFO, Controller and VP Finance of both Manufacturing and Professional Service Companies with expertise in the Aerospace, Consumer Products, Banking and Staffing Industries. Known as “The Valley Business Broker”, Steve serves Los Angeles and Ventura Counties. Visit Steve’s website at www.TheValleyBusinessBroker.com.