Optimizing Business Value in Owner Managed Businesses

September 23, 2015

Owner managers fall into three categories. Those who:

  1. Have no plans to transfer ownership
  2. Are thinking about ownership transfer; and
  3. Are planning transfer of ownership 

In common, they want the transfer to be for maximum value but few actually get to realise this goal. Who can predict when circumstances may force an owner to have to step aside? Planning for the transfer of ownership should not just happen in anticipation of retirement. An owner should always be trying to optimize their business' value to provide for dependents or  finance years of retirement.
For most owner managers their business is not only their retirement plan but their life insurance too. To provide sufficient value to take care of their families and in the later years, to fund retirement. Owning and managing a business is a high risk proposition. Owner managers work longer hours, skip vacations, and worry more. Take a moment to consider three components that whatever phase a business is in, require minimum maintenance and will help achieve this goal.
Each varies in importance to reflect the evolution of the business and will enable an owner  to quickly and effortlessly assess value potential whatever the circumstances:

Value Optimization - The Three Key Components

  1. Insurance - Insurance is the foundation particularly in the early years when there is insufficient value in the business to provide for the needs of a family left without its primary source of income. Personal insurance protection should comprise life and disability and be personally owned. The amounts will reflect both the personal and business circumstances and may be added to over time as tax liabilities or family needs increase or, remain untouched as the other components take on more importance in providing family protection.
  2. Organization - Most business owners are unpleasantly surprised when they learn the low market value of their business. Their influence and control is so embedded that the business would cease to function without them. Businesses organized for the exit of the owner attract greater value. To increase a business' attractiveness an owner needs to detach themselves. This part of the process ensures that an owner manager is spending time only on activities that enhance value. If you are not increasing value you are destroying it. Owners believe that no one can do the job as well as themselves. Taking time out to review changing organizational needs (e.g. organizational discipline, staff alignment, training etc) will help optimize value at all times and ensure an owner is contributing where it counts. Most owners assume that they will be bought out by a bigger player. While a sale may be certain the price won't be!
  3. Governing Process - The governing process is often in the owner's head. Many owner managers have spent all of their working lives building their business and have never been able to benefit from seeing other companies or industries in operation, most will never have been through a sale or succession process. At different times the owner's vision should be shared with objective counsel. There are different ways to obtain independent advice reflecting the size and complexity of the business. Public companies have boards of directors to fulfill this function however that role tends to revolve around compliance. An owner managed business will require different skills and experiences at different times with compliance likely to be the least of these. A periodic critical review will ensure you remain on strategy and able to grow in an informed manner. Engaged buyers will pay more for a business with a systematic, controlled approach to growth, risk and opportunity. 

Preparing for exit, planned or unplanned does four things:

  1. Improves the value of a business
  2. Improves the ongoing return 
  3. Mitigates risk for a buyer; and
  4. Enables seller to concede fewer conditions

Value optimization in anticipation of exit is an activity that we see owners ignore or defer. It need not be time consuming but it does need to happen for an owner to achieve their goals. 

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