Is the Business the Owner?
How Identifying Owner Dependency Can Save Your Business Purchase
Buying a business that depends too much on its owner can spell disaster. Nobody will buy a business if they think it could possibly collapse the moment the old owner walks out the door. Buyers need to be reassured that the business will survive a change of ownership. So how do you know if you are looking to buy a business that is overly reliant on the outgoing owner? This is how.
It would be foolish to risk your investment on a business that's overly dependent on one person. So, when buying a business, it is crucial to assess this issue. But, how?
If major clients have a close personal relationship with the outgoing owner, their loyalty might not transfer to the new owner. Ask what happens when customers call, are they calling for the Owner or is it the company name they identify with? Could any one of the qualified employees handle the customers’ needs as well as the Owner can?
Find out if the Owner is the key performer, or the only one to provide the service or product the customers of the business demand? Similar concerns arise if suppliers have personal connections with the owner. Ask yourself if the business you’re considering will function well after the departure of its founder? If the business's brand is closely tied to the owner's personal brand, customers might perceive the business as less credible without the original owner. Public perception matters too. If the owner is the face of the business, their departure could impact its public image.
What role do the employees play in the sustainability of a business? If key employees are highly dependent on the owner for guidance and decision-making, it could indicate a lack of leadership within the organization. If the outgoing owner is the sole decision-maker for key aspects of the business, their departure might lead to disruptions as the employees are unable or unwilling to take this responsibility. Look for signs that the owner is heavily involved in daily operations without clear delegation of tasks to others.
Why are documented processes crucial? Check there are systems in place that cover the day-to-day operations or technical aspects of the business. This makes the business smart and independent of the Owner. This smart business is usually seen in the form of systems, procedures, manuals etc. Ensure that the operations manual details the current daily operation of the business and shows that the staff handle the day-to-day tasks because of their training and the information contained in those operations manual. A lack of documented procedures can be a red flag. If the owner holds most of the business knowledge, it increases the risk of operational challenges post-transition. Remember, businesses with comprehensive documented processes are more likely to thrive after a sale.
How can financial records reveal a business’s reliance on its outgoing owner? Examine if there are revenue fluctuations tied to the owner's activities or relationships. Find out when the owner goes on holiday and see how the business performs during those periods. Ensure the profit margins are sustainable without the owner’s direct involvement.
So, what else can you do? Conduct thorough due diligence, focusing on the areas above. Speak with key employees, major clients, and suppliers to gauge their perceptions and dependencies on the owner. Evaluate the strength and capabilities of the existing employees. Understand why documented processes are crucial for a successful business transition and ensue they are complete, up to date and available.
How can you mitigate the risks of acquiring a business overly dependent on its owner? Make sure to include clauses in the purchase agreement that hold the outgoing owner accountable for a transition period. Consider earn-out agreements where part of the purchase price is contingent on the business’s performance post-transition.
