Ownership Dependency
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 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 your business depends on you as the owner if it’s due to you being the boss, the one with the ultimate responsibility as owner. That sort of managerial dependency can be replaced. The more value killing dependency is based on an owner’s unique, nontransferable skills, business relationships and contacts.
Compensation adjustments come into play If you are actively managing the business. If you are 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.
You need to determine market comp for the role and contributions you are making compared to your comp, and adjust up or down the difference from market to get to the right SDE figure.
If your salary is your company’s EBITDA / SDE, and you are working full time in the business, understand you’re really selling a job with risks and an upside, versus selling a company.
The ideal situation as it relates to owner’s compensation and business value are those drawing a salary as the “Chairman Emeritus” in effect, with no involvement in the management of 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 execute on any of the sales and operational contributions you add to company success.
