Commercial Integrator May 2021 - 14

AV AS A BUSINESS

Too Many Business Owners Make This Mistake
Business owners think they're doing the right thing ... but, by making this critical mistake,
they're killing their business valuation. Here's how to fix it. by Zack Gibson
MOST OWNERS we talk to would do anything for their business, but it rarely occurs
to them that their willingness to do so is
drastically killing their company's valuation.
The No. 1 company risk (reflected in over
95% of CoPilot assessments) is that the
business is too dependent on the owner.
This risk manifests itself in the owner being
too involved in sales or operations, having
too heavy a hand in customer or vendor
relationships, or simply not having a deep
enough bench of management talent.
From buyers, we found that dependence on an owner is also one of the most
common risks identified as one that would
limit their interest in acquiring a company or
significantly impact their view on valuation.

Why is Owner Dependence a
Risk Factor?
Most investors feel understandable trepidation about writing a big check to acquire a
company if the departing owner is intimately
involved with the current operations of the
business. After all, they are investing in the
future earnings of the company-if one of the
most important drivers behind the earnings,
company culture, and business growth departs the business, an investor is likely to view
the business as significantly less valuable.
Furthermore, owner dependence places
a ceiling on scalability and growth. These
businesses will struggle to create advancement opportunities for talented employees,
and the single point of failure will place a
governor on the rate at which the business
can expand and create incremental value.
Given that this risk is so prevalent and is
of such a concern to acquirers, how can you
proactively address it?
1. Identify Current Dependency: We
have an exercise we use with clients called
the 80/20 Rule where we ask owners to
track where they spend their time on a
daily basis, and then identify activities that
are most impactful for the business and
where they have a comparative advantage.
We have found this exercise to be incred14

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MAY 2021

When a company becomes too dependent on its owner, that puts the value in the
individual rather than the organization.

ibly illuminating to help a business owner
better understand where they actually
spend their time and identify tasks that are
easily delegable to others who are likely
able to do them better than the owner.
2. Develop a Hiring Plan: Next, we
develop a recruiting and hiring plan for key
members of the management team. Even
though the owner might not execute on this
plan immediately, giving thought to what
skills, experiences, cultural attributes, and
other elements will be critical to these hires
will help owners start to identify potential
candidates when the hire becomes financially feasible.
3. Determine ROI: Finally, we work with
the owner to understand what these new
hires will mean financially for the business.
Yes, they will require some initial investment but, if done right, they will also enable
faster growth and give the owner more time
to spend on the things he or she enjoys
(whether that's more time on innovation,
strategic initiatives, or simply more time
with friends and family).
One good way to begin making your
business less dependent on you is to spend
fewer hours at the office.
Begin slowly by not working evenings or
weekends, and, unless there is an urgent
matter, do not reply immediately during
off-hours if employees call or email. Have
the conversation with each manager and
discuss your plan. Empower them to pro-

mote themselves to the leaders you need
them to be (and be understanding when
mistakes are made as people learn). Once
they get the plan, your top managers will
start making more decisions independently.
The risk of a business being too dependent on the owner is very common, but
an intentional plan can help you mitigate
problems early to enable fast growth, more
value creation, and a better life for you as
an owner.
As an NSCA Advisory Council member,
Class VI Partners works with NSCA
integration companies on managing
mergers and acquisitions. Executive
VP Zack Gibson focuses on the sale
or financing of mid-market clients
across a broad range of industries.
Zack can be contacted at zgibson@
classvipartners.com or 303.243.5623.
Learn more about NSCA and how to
become an NSCA member at NSCA.org.

Test-Drive Co-Pilot

Commercial Integrator subscribers
can try Class VI's online market
readiness assessment: the Co-Pilot
program. Learn more here.
classvipartners.com/process/
assess/
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Commercial Integrator May 2021

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