How to Increase Business Value and Decrease Owner Responsibility

Submitted by John Brown on Fri, 04/12/2019 - 9:00am
Three small, solar-powered windmills set on a long wooden table. The background is blurred, but there are people working at the table.

Entrepreneurs have building and growing their businesses etched in their DNA. As time passes and their efforts pay off, several things can happen:

  1. Owners find that they aren’t as enthusiastic as they once were about devoting all their energy to growth.
  2. Owners feel burned out as they become overwhelmed by the complexity that comes with having a bigger, more valuable business. This burnout prevents them from focusing on additional growth.
  3. Owners get frustrated because the strategies they used to successfully grow their companies in the early days just aren’t working anymore.

In essence, running a business can run owners down. This means that by the time they decide to exit their businesses, owners simply don’t have the energy to plan for it. After expending so much time and effort building value, they view planning for the future of their ownership as tedious and difficult.

How can advisors energize them to continue planning? How can owners energize themselves?

Getting owners energized about their eventual exits typically comes back to one strategy: performing a Gap Analysis. One of the great by-products of showing owners the difference between the current value of their financial resources and the size of the nest eggs they’ll need to live the post-business lives they desire is that it gets their attention. For most owners, that gap is sizeable and will take time to fill. For most, the only way to fill the gap is to grow their companies.

The challenge for advisors is to answer the question, “How are we going to help owners grow their companies at the pace needed to achieve their goals and aspirations?” The answer to that question lies in the concept of increasing transferable value.

Increasing Transferable Value

As we’ve discussed, transferable value is the value a business has without its owner at the helm. Private equity groups and other professional buyers know that owners tend to leave their businesses after they sell them, rather than sticking around and helping. Ideally, the owner’s business exit is of little or no consequence to the business’ future cash flow and value. However, if a business cannot continue to grow in value and increase its cash flow without its owner, buyers aren’t interested. In these situations, which are common, owners must focus on increasing their businesses’ transferable value.

There are four common elements to consider when owners and advisors work to increase transferable value.

Element 1: Owners Willing to Change Their Roles in Their Companies

Owners must delegate meaningful duties to top management. They must also surrender, or at least share, control over many facets of their business operations. As Peter Drucker once wrote:

As a new venture develops and grows, the roles and relationships of the original entrepreneurs inexorably change. If the founders refuse to accept this, they will stunt the business and may even destroy it. But even among the founders who can accept that they themselves need to do something, few know how to tackle changing their own roles and relationships.

There is an inverse relationship between an owner’s importance to the business and its value: The more critical the owner is to business success, the less transferable value the business has. Since transferable value is what buyers pay for, it is what owners must work to increase. Advisors can help owners increase transferable value by assuring that every growth strategy they recommend is designed to build a business that can operate well without its owner.

Element 2: Next-Level Managers Willing and Motivated to Grow the Company

By definition, transferable value requires that management, not the owner, guides future business growth. Most business owners don’t know that, deny it, or refuse to believe that anyone other than themselves can do that. Advisors must do two things to avoid that roadblock:

  1. Educate owners on the connection between transferable value and future business growth.
  2. Suggest a process for ensuring that management is up to the task.

Element 3: A Focus on and Fostering of the Company’s Value Drivers

Advisors must focus everyone’s attention on the company’s Value Drivers. This includes the owner, the management team, and the owner’s other advisors: All of them must understand what Value Drivers are, which ones are most important, and how to best install them. (We’ve created a handy eBook on Value Drivers to help advisors understand them better.) Value Drivers are critical to increasing both business value and transferable value.

Element 4: An Organized and Coherent Process That Coordinates Everyone’s Efforts

Involving outside advisors in improving business operations, procedures, processes, and planning requires owners to accept outside advice and implement it. Peter Drucker noted:

. . . the founder does need people with whom he can discuss basic decisions and to whom he listens. Such people are rarely to be found within the enterprise. Somebody has to challenge the founder’s appraisal of the needs of the venture, and of his own personal strengths. Someone who is not a part of the problem has to ask questions, to review decisions, and above all, to push constantly to have the long-term survival needs of the new venture satisfied by building in the market focus, supplying financial foresight and creating a functioning top management team.

In most closely held businesses, that outside advisor is typically an Exit Planning Advisor or a consultant brought in by the Exit Planning Advisor.

Of course, charging others with assuming some of their responsibilities requires owners to develop role-changing, transferable-value-building attitudes. Owners must transition from being the center of all decision-making and activity in the business, or hub of the wheel, to an important but less critical spoke of the wheel. This transition is not easy, but with knowledge of Exit Planning, advisors can:

  • Understand how and why owners need to change if they are to meet their financial and other exit goals.
  • Educate owners on how changing their role benefits them, their companies, and their employees.
  • Provide access to the advisors who can undertake value-building tasks.
  • Quarterback an owner's Advisor Team to keep everyone accountable and focused on the owner's goals.

Takeaways

  • Owners are often victims of their own success: The more significant they are to their companies’ success, the less valuable their companies are to buyers.
  • A major aspect of growing business value and cash flow is persuading owners that the most important step in creating transferable value is reducing the business’ reliance on them.
  • Owners willing to transition responsibility rarely do so without the support and guidance of outside advisors.

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