Is It “All About You”

Is It “All About You”

By Kim Levin

May 21, 2008

Or Is It A “Real” Business?

Many self-employed people consider themselves “business owners”, but are they really? There is an important distinction between owning a business and owning a job. Does it really matter which category your enterprise falls into? Yes, it matters a lot if the owner plans to exit the business at some point in the future by selling it.

Every closely-held business owner grossly underestimates the significance of his or her own, personal value to their business. This includes the value their contacts, their relationships, their reputation, their experience, and their personal efforts. They talk about how “great” their employees are, and say things like, “this business could run on its own without me”. Ninety-nine times out of a hundred, they are wrong! In fact, most of these businesses would be severely impaired, if not destroyed, upon the unplanned exit of the owner.

The difference between owning a business and owning a job is sustainability. A sustainable business has management depth and a solid management succession plan. The owner of the sustainable business recognizes the value of investing in quality people and training; an investment that usually pays off handsomely in the long run.

How much is sustainability worth to an owner? Here is a recent case study: a client’s metal fabrication business generated about $2 million in cash flow (EBITDA). Over 50 qualified buyers looked at the business and more than half of these were initially interested. Quickly, however, most of the buyers concluded that there was no management depth in this business and withdrew from the process. One said, “ordinarily, we would have no problem paying 6 times cash flow for this type of company, but because Mr. Van Buren appears to be so critical to the success of the business, it is just too risky for us and we’re going to pass.”

This business was clearly not sustainable-or at least it was not perceived to be sustainable by any of the buyers. The consensus was that the business was nothing more than a really great paying job for the owner. Eventually, the owner did sell the business to a displaced corporate executive who was looking for a job. The buyer managed to scrape together the financing and purchased the business for $6 million-a 3 times multiple. In this case, by misjudging his own value to the business and ignoring the benefits of grooming a successor management team, the owner left up to $6 million in additional value on the table!

Owners may find it flattering to be considered “indispensable” to their business, but it is through making themselves more dispensable that they become richer!