Vacation – it’s often an elusive concept for the owners of small and family businesses. Even when owners do take time off, chances are they’re still checking in constantly, which has become increasingly easy to do in this age of the smartphone and near ubiquitous Internet connectivity. The ironic thing is that this constant owner involvement can actually be detrimental in the long run and decrease the value of the business from the perspective of potential investors.
A recent article in Insurance Journal, “Is Taking a Vacation a Good Way to Increase Agency Value?,” highlights just how important it is for owners to step away from their businesses to help increase the value of the business in the long term. As we have discussed in previous blog posts, the attributes of a quality business include:
- Lack of owner dependence
- A strong management team
- Strong balance sheet
- Low customer concentration
- Written processes and procedures
- Stable or ideally improving profit margins and revenues
Reducing owner dependence on the business is extremely important from the perspective of a buyer. The business must be able to run without the daily involvement of the owner, which means owners need to hire and retain key managers who are smart, can garner the respect of the employees, and help ensure business continuity without dependence on the owner.
Business owners that believe they are doing the best for their company and family by handling everything are actually creating a trap for themselves. Too many owners find themselves in and unable to easily extricate themselves from their businesses. They cannot go on an extended vacation, cannot be away from the business without constant communication, and worry that things will fall apart or not be done correctly if they are not there. These owners have created businesses that most likely cannot continue without them. If they were to experience an unexpected event, such as death or disability, their businesses would falter, the values would plummet and their families could be in jeopardy.
Here are some suggestions from the Insurance Journal article on ways to reduce business dependence on the owners:
- You are not your business. It is important to have a life outside of business.
- It is important to hire the right people and train them to do the work, so owners can delegate.
- Owners need to focus on managing the business and not work “in” the business so much.
- A business is more valuable to buyers when it is not solely dependent on the owner(s).
So, the authors of the Insurance Journal article suggest (and we agree): “if an owner wants to improve their business – they should plan an extended vacation! The staff, family and maybe even the clients will be glad they did!” It can also help an owner to see where the gaps are and where improvements need to be made in order to decrease owner dependence and increase business efficiencies and value.
We discuss this frequently: Business owners need to remain vigilant and nurture the company to maximize and protect the value all along the way. A great place to start is to decrease owner dependence and establish professional processes and procedures to ensure the continuity of the business. Owners need to always treat their businesses as an investment, not a lifestyle, and, avoid the trap of letting their personal identities get wrapped up in the company. And besides, after working all these years to start and grow your business, you deserve a vacation!