If the value of your company would suffer in your absence, the biggest threat to its marketability might be you.
“Buyers generally aren’t interested in paying top dollar if the business is overly reliant on the owner for its success.”
That excerpt from a long-ago IBG Business article (“How Can I Increase the Value of My Business?“) recently came to mind when one of our M&A advisors discovered and began quoting from Michael Gerber’s 1988 best-seller, The E-Myth: Why Most Businesses Don’t Work and What to Do About It.
In case you have forgotten or are too young to know, the “E-Myth” (or “entrepreneurial myth”) is that most businesses are started by people with tangible business skills.
That, Gerber argues, is simply not the case.
Instead, most start-ups are born out of what he calls an “entrepreneurial seizure” that occurs when an individual with a marketable skill decides they would be better off performing it on their own than for someone else.
The entrepreneurial seizure quickly arcs to what Gerber terms the “fatal assumption” – the flawed belief that “if you understand the technical work of a business, you understand a business that does that technical work.”
Consequently, as a Tyler DeVries book summary puts it, the skilled tradesman who thinks he is starting a business may simply “take the work he loves to do and turn it into a job.”
Hemmed in from the start by the founder’s fatal assumption, many businesses, even some that grow and achieve financial success, never reach their full value because the owner spends more time and energy working in their business – i.e., doing the skilled work that they love – than working on their business.
Troubling Traits. Mature E-Myth businesses of all sizes tend to exhibit certain tell-tale signs:
- The owner – let’s call him “Dennis” – is nearly always present.
- Dennis devotes more hours than most of his employees to doing the business’s core work.
- He makes all of the major (and many of the minor) decisions.
- There is a substantial gap between Dennis and his next level of management.
- The company has outgrown its operational and management structure.
- Dennis has the primary relationships with major customers and suppliers.
- If Dennis is absent for more than 10 days, things start to go wrong.
- If asked to describe the company’s future, Dennis is more likely to speak in operational terms than in strategic or visionary terms.
- If asked to describe his personal future, Dennis might struggle to distinguish himself from his business.
To be clear, a technician/founder can eventually become a better owner, and he can grow his creation into a business that, on the surface, looks like an attractive acquisition target.
But a potential buyer’s glimpse under the covers might quickly reveal a core problem: The owner loves doing the work of his company to the point that he is omniscient, omnipresent, and overbearing. In his absence, the company isn’t totally viable, and, unless the buyer needs for the owner to stay on after the sale (see our article on industry rollups), the company may be worth its book value and little more.
Solutions in Print. While Gerber does a masterful job of describing the problem, the real value of The E-Myth and its progeny is that they provide therapeutic steps that can help an entangled business owner execute a pivot, breaking free of their comfort zone and morphing into a more valuable leadership role, maximizing business viability and value separate from their incessant presence and hands-on involvement.
In addition, Gerber’s 1995 sequel, The E-Myth Revisited, provides a business development process that serves as a framework for developing turn-key systems throughout an organization to produce predictable results and grow in a sustainable way.
Guidance in Person. It should go without saying that we think the E-Myth series is a valuable read for business owners who, looking to sell some day, have decided to get serious about preparing their business to stand on its own two feet.
And that’s where IBG often enters the story. For us, the business is the product. To help shape a good company into an attractive acquisition target, we often start our preparatory work two years before the company is ready to go on the market, focusing on such priorities as:
- cleaning up and recasting financial information;
- improving cash flows;
- selling off or disposing of unproductive assets, product/service lines, and inventory;
- diversifying client and vendor concentrations
- attracting and developing key employees and fostering an effective management team on which a new owner can rely;
- identifying and protecting intellectual property and other intangible assets (trademarks, patents, copyrights, and any other proprietary information) that set your company apart from competitors;
- documenting key processes; and
- identifying and building on the business’s competitive advantages and attractiveness to the best-fit buyer.
In the process, we invariably invest time and energy in the owner, helping them prepare mentally and emotionally for the rigors of the sale experience, and identifying roles in the company’s management and operations that the owner should no longer fill if the business is to achieve optimum value.
As a business owner, it’s important to recognize that the value of your company lies not just in its assets and profits, but in its ability to exist independently of its owner. This means taking steps to establish a structure, management environment, and culture that can thrive with or, ultimately, without you.
That’s a tall order, one that you don’t need to tackle on your own. To find out how we might help, contact an IBG M&A professional.