Minimizing Owner Dependency: A Vital Step in Maximizing Business Value

Alex Medaglia

October 2023

When it comes to preparing your small or medium-sized enterprise (SME) for sale and optimizing its market value, one significant factor looms large: owner dependency. In the world of mergers and acquisitions, prospective buyers are understandably cautious about investing in a business that is overly reliant on its owner. After all, what’s the appeal in purchasing a business that cannot function efficiently without its owner?

The answer is clear – there isn’t much. Such businesses are often perceived as high-risk and consequently, they are challenging to sell, let alone achieve a respectable price.

Many SMEs evolve from humble beginnings, often commencing as a one-person show. They grow over time as additional staff members are hired to support the business’s expansion. However, it’s not uncommon for this growth to lack proper delegation practices, preventing employees from making vital decisions and managing core aspects of the business autonomously. In other cases, the absence of documented systems, policies, and procedures necessitates regular consultations with the owner for approval or guidance on the next steps. This situation not only hampers efficiency and productivity but also culminates in an owner-dependent business. This is a less-than-ideal proposition for potential buyers.

The transformation of such a business into a valuable asset hinges on, politely put, the owner’s removal from the equation. In an ideal scenario, no facet of the business should rely on the owner, and comprehensive policies, procedures, systems, process manuals, workflows, templates, and checklists should be firmly in place. Employees must be empowered with the delegated authority to manage the business independently, making decisions within predetermined limits and adhering to established corporate governance structures to mitigate risks. This approach effectively reduces owner dependence and enhances the overall value of the business.

Most employees are not only willing but also eager to take on additional responsibilities, provided the process is well-structured, clearly communicated, and defined within well-defined boundaries. This arrangement serves to protect both parties, fostering a collaborative and efficient work environment. Beyond mitigating risks, this approach also has the dual benefit of making the business a more attractive place to work and, in all likelihood, enhances overall productivity and profitability, subsequently bolstering the business’s valuation.

Mitigating owner dependency is not just a necessary step in preparing an SME for sale; it’s also a fundamental strategy for enhancing its overall value and attractiveness in the eyes of potential buyers. By establishing a clear and independent structure within the business, you not only reduce risks but also foster an environment where employees can thrive, ultimately leading to increased productivity and profitability. In essence, the reduction of owner dependency is a win-win situation for all stakeholders and a pivotal component in realizing the true potential of your business.