Business owners take pride in what they build. Many owners serve as the engine that drives the business, and without them, the business would fail spectacularly. Successful business owners have proven how important they are to their businesses. However, their importance to the business is the biggest planning challenge business owners will face as they approach their retirement.
Most business owners understand that they’ll exit their businesses someday, whether by choice or fate. For business owners who want control over how they exit their businesses, there is no worse position than being consequential to the company. The experiences of countless owners and Exit Planning Advisors provide one proven conclusion: Business owners who want a business exit on their terms must become inconsequential to the business.
In this article, we’ll look at why it’s important for business owners to make themselves inconsequential to the success of their businesses, and how they can do it.
Why Business Owners Should Make Themselves Inconsequential
The idea of becoming inconsequential to the business can be jarring to business owners, especially after years of building, growing, and maintaining the business’ success. Who else can possibly do all the things the owner has done for the business? Whom can owners trust to do even a fraction of the things that they do every single day? What’s the point of owning a business if the owner isn’t essential to the business?
The answers to these questions can be challenging to find. But by simply considering these questions, business owners take the first step toward understanding why becoming inconsequential to the business can strengthen the business and put them on the path toward a successful business exit.
It’s important to reiterate: Until immortality reigns, all business owners will one day exit their businesses. Owners have no control over this fact. What they can control, however, is how they exit their businesses. To leave their businesses on their terms—that is, when they want, for the money they need, and to whomever they choose—the business cannot rely on the owner for its success.
There are numerous ways for owners to exit their businesses. They can sell to a third party, like a larger company or private-equity group. They can transfer ownership to insiders, such as family, management, or co-owners. They can even find something of a middle ground by establishing and selling to an ESOP. Regardless of the Exit Path they choose, one thing is clear: A business that relies on its owner for success is worthless to all buyers.
We’ve talked about transferable value in the past: It’s the value a business has to someone else without the presence of its owner. Thus, no matter whom owners intend to leave the business to, the business must be able to stand on its own without its original owner to be worth anything, let alone enough to assure the owner’s financial independence.
In short, to have a successful business exit, business owners must be inconsequential to the business’ success. To exit how they want, owners must shirk their egos.
Now that we know why being inconsequential should be a goal for any owners who want to exit on their terms, let’s look at a few ways how owners can become inconsequential on their terms.
How Business Owners Can Become Inconsequential
Becoming inconsequential isn’t as simple as doing less within the business. Doing less within the business is the outcome of being inconsequential, but to get to that point, there are a few things owners can do.
Find and Keep Next-Level Management
Nothing is more important to becoming inconsequential than having next-level management. Recall that next-level management isn’t simply good management: It’s management that can bring more value to the company than even the owner can. The challenge for owners is finding next-level management and keeping it onboard as the owner exits. To overcome this challenge, business owners must network and find people who can put them in touch with next-level managers.
Exit Planning Advisors serve as a hub for owners and advisors from different professions who can widen the net that owners cast in looking for next-level management. Once those managers are found, Exit Planning Advisors and their Advisor Teams help owners implement strategies to hire and keep those managers with the company as they exit. This increases the business’ value, whittles down the responsibilities exiting owners have, and gives owners more flexibility in when they can exit.
Reduce Threats to Business Value
Successful businesses constantly face threats to their value. While some of these risks are uncontrollable from a business standpoint (e.g., economic downturns, acts of God), the three most common threats are controllable.
- Overly ambitious key employees: It’s surprisingly common for key employees to derail unprepared owners’ Exit Plans. For example, key employees might demand outrageous compensation to stay with the company, or leave the company and take clients, other employees, or vendors with them upon learning that the owner wants to exit. To avoid this risk, owners must consult with the proper advisors. Their advisors can either create incentive plans that encourage key employees to stay and contribute during and after the owner’s exit, or, failing that, find more appropriate employees to replace them.
- Running off with the first suitor: Sometimes, third-party buyers approach owners with an offer out of the blue. For most owners, even sitting down at the table with such buyers can damage their businesses’ value. Unless the business is completely prepared for a sale to a third party, business owners must avoid the temptation to take buyers up on their offers. There are two reasons for this: (1) Most third parties use professional buyers to purchase businesses. These buyers often have much more knowledge of the nuances of business sales than business owners and can take advantage of them. (2) A business that goes to market and doesn’t sell (i.e., taints the marketplace) can permanently damage the business’ value, regardless of how well run it is after the initial sale failure. By consulting an Exit Planning Advisor, owners can protect themselves from this threat. Exit Planning Advisors construct Deal Teams and work with other advisors who specialize in due diligence to assure that the business is ready for sale.
- Refusing to pay to reduce threats: Everyone knows that an ounce of prevention is worth a pound of cure. Yet, many business owners don’t want to pay to protect their businesses from things that have never threatened them in the past. But as owners approach their exits, new threats and risks present themselves. Having the best Exit Planning Advisors and Advisor Team to identify unforeseen threats may cost owners money up front. But that cost is almost always smaller than the price of cleaning up messes as they occur, and it has the bonus of adding value while it protects the business.
Becoming inconsequential to the business is nearly impossible for owners to do alone. Consulting with an Exit Planning Advisor and Advisor Team is a proven way to make the business less reliant on the owner, which provides owners with opportunities to control how they successfully exit their businesses.