Can you prove to a buyer that you have been able to take at least two weeks off (14 days in a row), preferably four weeks, with minimal contact with the business to guide day-to-day operations?

What? What does taking a vacation (whatever that is) have to do with running a profitable business?

The big question for an owner-operator buyer is whether they can see themselves as the owner of this business or whether they are going to be saddled with a massive investment that drives them crazy. The difference isn’t in the numbers. Those are relatively easy to interpret. What makes the difference is the employee team. Satisfying that concern can literally double the value of your business.

Double? Yes. The capabilities of the employee team make the difference between selling for 2-3 times the net profit, for selling to another owner-operator, and selling to a strategic buyer or private equity group for 4-7 times the net profit.

The acid test of whether the business can run itself without your constant supervision, instead of it running you, is whether you can take some time away from it. You may say you can, but have you actually done it?

If you haven’t, then the business depends on your presence, even if you have dozens of employees. Maybe not every second, but every day, for unpredictable but significant amounts of time. You’re inviting a buyer to take on a job that is at the least similar to a full-time job; as many small business owners know, it may be far more than “full time”. You are firmly in category A (2-3 times net). Private equity and strategic buyers already have well-paying jobs; they aren’t looking for yours. They’re looking for an investment.

What makes the difference in owning your company being seen as an investment rather than a job? The capabilities of your employee team.

What’s wrong with being an owner? You’re taking out enough compensation to afford a decent lifestyle (especially since you don’t have to budget for vacations). It’s a far cry from the early days when you started the business from scratch or took over a failing business for next to nothing, and you ate peanut butter and ramen while you built it up from nothing. Busting your butt for minimum wage and burning the candle at both ends is part of the entrepreneurial mystique.

The thing is, anyone interested in buying your business is not an entrepreneur — someone who lives to create something. Your business has already been created and is delivering reliable results. Your buyer is a person who is interested in a secure job with a reliable company, just not the one they are with now. They’ve been successful before: you’re looking at someone who knows where to get $100,000 (often much more) cash to put into the business and be taken seriously by a lender for the rest. They may be willing to put in the long hours and shoulder all the responsibilities for running the business, but they aren’t going to do it for entry-level income.

And it gets worse. No matter how reasonable their expectations are, the business must generate a lot less net profit for the buyer than it does for you, because it must cover not only the buyer’s (owner’s) compensation but also the debt service from buying the business – a major cost that you aren’t carrying now. Such businesses command a price of 2 to 3 times the net profit.

And to get the price nearer to 3, you need to satisfy this buyer that, while the owner is necessary to the running of the business, they will not be stuck trying to run it by themselves. The last thing they want is to take over and all the capable employees quit. The next worst scenario is to discover that everyone is so poorly trained or afraid to take action that the owner must oversee every aspect of the business, telling everyone what to do all day long. That would explain the long hours, because you can only start to do your owner-manager work after the employees have gone home for the day. Businesses like that have a hard time getting even 2x the net profit as a sales price. A financially qualified buyer with some relevant experience doesn’t want to be a drill sergeant 8 hours a day and do the back-office work deep into the night, and they’re not going to pay a premium price for that opportunity.

Let’s rewind the scenario. Your business is a smooth-running machine. People know what the roles are and perform them without your constant guidance. Your buyer can do owner-type work (marketing, financial, etc.) during the day and at moments of convenience. Maybe they only have to put in 20 hours a week or can leverage other time to accomplish these goals. They may well be willing to accept a smaller split in the net profit between compensation and debt service: in other words, they could pay more for the business. Now your price is going up into the 3+ multiple.

You’re also attracting multiple buyers, which helps drive the price up, or even private equity investors. If you’ve got time to devote to owner work, instead of running the cash register and taking orders, you’ll have more time for marketing or perhaps identifying better supply chains or finding a better lease. The business will grow more profitable. Show a positive trend, and investors will be attracted. They don’t want to buy jobs; they want future earnings. They may well be very satisfied with a $50,000 profit on the money they lay out to buy your company, or one-half of what an owner-operator would want. And that is reflected in the multiple they will pay: they can afford to pay twice or three times what a private owner would, because they aren’t planning on living off the business’ income and usually there is no issue of debt service.

To get to that happy scenario, the buyer needs one thing: a capable employee team that can operate without you — and therefore without the buyers. That team, if well-treated and fairly compensated, can and will keep the business running, at least to the level that the buyer can focus on business building.

How do you make that magic happen? Empower, but wisely. Let every team member take ownership of as many aspects of their own job as they can handle and you are willing to risk. Some will prove to be unable to operate without constant and specific guidance. The majority will get along just fine doing what they already know how to do; you need that too. A few will turn out to have strong skills in leadership, customer management, or organic sales and marketing. They may even outshine you. Be glad for that. Give them managerial roles and increase their pay. Of course you can afford it. You’ll be increasing your profit in the short-term and you will be doubling the value of the business when you’re ready to sell.

If you need help thinking about the possible value of your business, or what you can do to optimize that before selling, use this link to set up a call at https://www.thebusinessdealer.com/contact