Growth

How to build the value of your business by taking yourself out of it

- June 21, 2024 3 MIN READ

 

Value and value in business is a very subjective topic.  Bill Withers, small business strategist and author of Succession Thinking explains why there is more to value than money alone.

Many would state value as the financial valuation of the business, and this can be represented in dollar terms. Although maximising your financial valuation is important, owners of small and medium businesses, usually have a more extensive view of value.

I discovered this for myself by building three service-driven software companies over the last 35 years, and by interviewing other owners over the last 10 years, I have found that they value:

  1. Sustainable dividend returns (and funds for reinvestment)
  2. The business is prepared for sale if the right offer was made
  3. Financial valuation is continually maximised
  4. Critical stakeholders (employees, customers and suppliers…) are cared for
  5. Discretionary time is maximised – I am not a victim to the operations of business

Maximising value is in achieving all of these.  Weighting and priority vary significantly, but this list is common across SME owners.


Many advisors and owners focus on maximising next year’s profit or growth as critical goals of the business.  However, there is a trap in doing this if the growth involves continuing to wrap the business around the owners. This therefore does not increase value it decreases the value.

I’ve discovered that many small and medium owner-led businesses (the people that own and run their businesses) get to a position where they are throwing stones at their business. Their business is profitable and meeting financial objectives, but they are unhappy.  They have no discretionary time and they are on the hamster wheel of operations.

Another interesting outcome of building a business wrapped around the owner is that the valuation is NOT maximised. A business buyer wants the business to be successful into the future. There is a very large risk for the buyer if the owner is too critical to success. In this case, it is common for the buyer to make an offer connected to future performance or lower the valuation.

Regardless of whether the owner wants to develop a long-term business or sell it, there is a significant motivation to develop others to run the business.  The critical point here is to develop others by handing over accountabilities including key decision rights.


Watch Bill Withers gives AFS Group advice on succession planning.

Handing over accountabilities to others is valuable but difficult – Why?

Accountability could include everything from the hiring of a person to the deployment of capital for product development. I make the point about decision rights because these are often concentrated in one place – with the owner.

The process of handing over accountabilities is complex and there are many reasons why it is difficult. The following are common problems in small businesses that make handover difficult.

Lack of clarity of where accountabilities sit

Most businesses evolve by the owner being a technician. An expert in the offering of the business. However, as the business grows the owner gets an extensive set of roles that have different accountabilities.  These roles are often ill-defined, so handing over accountabilities that are not well-identified is difficult.

The standard set of roles that are held by owners is: owner, director, organisation leader, team leader and technician. The accountabilities for the operation of the business are held by the team leader and technician roles. These roles tend to dominate, and the owner often has no time to do the work of the owner and organisation leader (the strategist). In my book Succession Thinking I state the first principle and place to start is to: Seek Role Clarity.

Not enough trust or understanding of trust

For the owner to be comfortable to handover an accountability they must trust the successor. Just as importantly, the successor needs to be willing to accept the handover. The only way this can be achieved is with a high level of trust.  It is also common that a historic trust breach impacts their potential for future trust building.

In Amy Edmondson’s trust model (Novartis Professor of Leadership & Management at Harvard) she describes two equally important types of trust. Psychological safety and accountability. In short, psychological safety is the belief the person feels comfortable to speak freely with ideas, questions and concerns. Accountability is that the person owns their stuff and takes responsibility to do the work. In this model, high levels of psychological safety and high levels of accountability define the learning zone. For successful accountability handovers, both the owner and their successor need to be in the learning zone.

The value of your business will go up by truly empowering others to lead and taking yourself out of it.


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