In simple terms, a business that relies heavily on its owner is not as valuable as a business that is not reliant on its owner.
Many business owners don’t understand how reducing or minimising the risks of key person reliance can significantly improve the value of their business.
Buyers will pay a higher price for a business that can be easily integrated into their current business or smoothly transitioned to a new owner. They will want some comfort that the business’ key customers and staff will stay with the business once the current owner departs.
What can you do to reduce or minimise the risks of key person reliance?
There are many different business and risk management strategies that you as the business owner can implement. Some of these include:
- Business systems:- introduce systems into your business. For example, a good quality stock management system will reduce reliance on the owner’s product and services knowledge.
- Client Relationship Management:- establish customer relationship management protocols so staff can manage key customer relationships.
- Management Succession:- invest in the professional development of your key staff so they can eventually share in part ownership (succession planning) of the business.
- Business insurance:- in some cases the specialist nature of the service provided means that it is difficult, if not impossible, to remove key person reliance. In these cases the purchase of appropriate business insurance may be an effective strategy.
As a business owner, it is a valuable exercise to assess the impact of key person reliance on your business. If you believe the value reduces in your absence, then consider what strategies you can put in place to change that outcome moving forward – it may be one of the above or it may not. The pay back to you could be substantial.
If you would like to explore how our Outsourced CFO service may be able to help you reduce the key person reliance impact on the value of your business, please contact David Young or John de Blonk Smith or call us on 07 3221 4465.