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Ownership Dependency

Updated: Dec 13, 2023

If you are a business owner hoping to sell one day, you have probably heard that the more the business depends on you, the harder it will be to find a buyer. “Ownership Dependency” is one the main reasons small businesses do not sell.

A buyer wants confidence that sales and earnings will not be impacted by your departure. For many smaller companies, the owner’s unique skills and role as "chief rainmaker" make them instrumental to future success.

So, the job all along is to phase yourself out of your own business if you want to sell to an outsider. You need to make the transition over time from active leader to company ambassador. More mascot than quarterback.

And to do that, you’ll have to develop the happy culture, reliable systems, trusted managers, and star employees that can do anything you can do, and more.

It’s ok if the business depends on you as as manager and decision maker. That sort of managerial dependency can be replaced. The more value killing dependency is based on an owner’s unique, non-transferable skills and business relationships.

It will be critical to your business sale success to develop others and systems that can perform all of the roles you do.

Compensation adjustments will come into play when you sell. If you are actively managing the business and not drawing a salary, that will negatively impact business value. A buyer will reduce your company’s EBITDA / Seller’s Discretionary Earnings by an estimate of the salary a manager would command to perform your role.

Determine the market comp for the role and contributions you are making compared to your pay, and adjust up or down the difference from market to get to the right adjusted EBITDA/SDE figure.

If your salary is your company’s EBITDA / SDE, and you are working full time in the business, you’re really selling a job with significant upside and some risks, versus selling a company.

The ideal situation as it relates to an owner’s involvement, their compensation, and business value, are those who draw a passive salary as a “Chairperson Emeritus”, with little to no involvement in managing the business.

Those salaries get added back to EBITDA/SDE , and increase business value, since they represent another form of ownership return, and are not a true management expense.

As a business owner with a business sale exit strategy, the work starts years before to develop the people and systems that together can continue to create the value you have with your company.

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