5 Things to Know About a Managed Business.
One of the most sought-after business types that I sell is a “Fully Managed” business. Essentially, buyers are asking for a business that is managed by staff, runs well and that doesn’t require them to work full-time in it. Others want to go further and want the business to return a regular dividend without any input from them. For business owners, getting their business to this level will mean that they have a highly sought after and very valuable business.
That all sounds great, but like everything, there is more to it. These are 5 things that should be considered before a business can truly be called fully managed.
I hear it a lot: "I'm looking for a Managed Business that I can buy that has a bottom line of...(usually far too high) and my budget is… (usually far too low)".
Let's first dispel a myth: there is almost no such thing as a passive private business investment - even shares in public companies (arguably passive) require investors to keep an eye on performance, pay management fees and accept relatively much lower returns. The words "passive investment" and "high returns" should set alarm bells off and seeing any investor running the other way! Every business needs an owner's input and oversight to some degree - full stop!
Back in reality below "passive investment utopia" but above the full-time working owner-operated businesses that are the majority, there is a small band of businesses that, to varying degrees, enable an owner to remove themselves from the day to day running of a business and those we might call managed. And in a nutshell, that removal from the day-to-day is what differentiates a managed business from the rest.
Here are five aspects of business and the conditions that need to be met for a business to be truly considered managed:
1. Price/Earnings
For listed companies, recent price/earnings ratios have investors paying 20, even 40 times earnings. I have not seen many businesses (barring statistical anomalies) sell for more than 4 - 5 times earnings let alone 20. Obviously, anything even nearing managed commands a premium, so buyers need to be prepared to pay a higher price or accept a lower return.
2. Staffing
If an owner is working in the business, it is not managed. If the business could fully staff itself and could sustain the extra wage of a manager’s salary expense to replace the owner, then perhaps it is coming close. But this will have an impact on price/earnings value ratios, and the subsequent value of the business. But be aware extra staffing costs equivalent to replacing an owner's time in the business probably will not replace the owner skills and involvement. The cheapest test to see if the business is managed is for the Owner to take a three-week holiday, and count how many times they are contacted? When they come back, see if it is the way they left it? Could they immediately leave it for another three weeks? Will it make money in the meantime? Will it still be there?
3. Governance
Just about every reasonably sized business could do with more of this, but managed businesses cannot do without it. The business must have systems in place to allow the absent owner to know what is going on and to direct the business forward without actually being there. If it is not going forward without the Owner working in it, it is not a managed business. At best it might even be a mismanaged one. Needless to say, an excellent manager to implement and drive the business, channel information and implement Owners strategy goes part and parcel with a managed business and should already be part of the staff roster.
4. Systems and Procedures
These go hand in hand with good governance along with effective training. It means the Owner is on the same page as the person running the show. Franchises are big on this one and for good reason; they simplify each function, agree on expectations, and then delegate the roles downwards, the result is that the owner is not required to supervise on a daily basis.
5. The point of last resort
Unfortunately, there is no escaping it. People who own businesses work way more than a 40-hour week when the chips are down. When times are tough, an owner will have to front up and muck in until the business is back on an even keel. The smaller a business is, the more fragile it is and the harder it is to pull an Owner away from the day-to-day operations. However, if an Owner has achieved the ability to be absent, beware that in times of crisis the business will pull the Owner back in and the longer they are out, the harder it is to go back in.
It is a shame some people do enter business ownership looking for a business that they do not need to be fully immersed in. In some ways it sort of defeats the purpose and standout characteristic of a successful business ownership. If you do not want to take risks or get involved, stay on a salary. If you do have the appetite or, want to dip your toes in to business ownership, be realistic.
Most businesses need their owner's input and commitment to grow, and even businesses where an owner is not there every day need direction and drive and sometimes a little bit more. Having said that, if you can pull it off, to achieve an (almost) fully managed business you have something very, very valuable and we should talk.
