Reducing Owner Dependence
The Situation
You're a founder getting ready to sell your business or know an owner who's preparing to step back. You're used to making a lot of decisions. Maybe some decision-making has been delegated, but it's inconsistent. Past hiring for leadership positions hasn't always worked out. You're on the cap table and are personally guaranteeing a line or leading key banking relationships. The justified pride you feel at being known as the owner of your business is slowly turning into uneasiness that customers are buying from you and not the brand. It's time to start thinking about institutionalizing decision-making, relationships, and financial structures to ensure that your business survives beyond an individual owner, but the path towards operational independence isn't clear.
Successful founders are usually successful because they care, and care obsessively. In practice, though, when you're getting ready to sell your business or take on outside investment, you have to be able to demonstrate that the business can function and flourish without you.
The Play
The Successful Step Back
Ownership Dependence: If you get hit by a bus, would the business be in crisis?
Identify financial dependencies the business has on you personally.
Ensure your organization will be able to maintain the same types of financial relationships in your absence.
Institutionalize customer and team relationships.
Regularly discuss with your team how and how much you want to be involved.
Operational Dependence: What will operations look like if you're not involved?
Know yourself, and create priorities.
Hire competent outsiders -- build out a management team.
Mentor, train, and delegate.
Document institutional knowledge and key processes.
Scale functions to be truly independent.
Go Long
New Essay: The Kingdom or the Crown
“The reality is that if your business is dependent on you, it’s less attractive to investors, harder to transition to new ownership, and unnecessarily chaotic to wrangle if something happens to you.”
Video Series: Owner Dependence
In her role on the investing team, Managing Director Emily Holdman has had thousands of conversations with founders, owners, and operators as they navigate what's next for their companies. Emily shares her insights on overcoming the challenges an owner-reliant company faces.
Throwback: Why You Can’t Sell Your Business
We first talked about the dangers of having a business that can’t exist without you here. Spoiler: There are a lot of reasons it might be hard to sell your business.
Go Deep
Curiosity sparked? We've put together a list of resources on owner dependence, control trade-offs, and personal planning.
Business Succession Planning: Cultivating Enduring Value (Deloitte)
+ A compilation of six volumes on the nuts, bolts, and importance of succession planning and ownership transition. This guide covers everything from the need for planning ("For a business, working without a succession plan can invite disruption, uncertainty, and conflict, and endangers future competitiveness. For companies that are family-owned or controlled, the issue of succession also introduces deeply emotional personal issues and may widen the circle of stakeholders to include non-employee family members.") to its function in cementing a legacy ("What is a legacy? Is it the continuing operation of your business? It can be. Your personal wealth? Your family’s wealth? The brand image and reputation you’ve built? The lifestyles and careers of your children or other successors? Yes to all.").
From Trust to Impact: Why Family Businesses Need to Act Now to Ensure Their Legacy Tomorrow (PWC)
+ See especially the final section on Family Dynamics, taken from PWC's 10th Global Family Business Survey: "Family harmony should never be taken for granted. It needs work and planning, and it should be approached with the same focus and professionalism that’s applied to business strategy and operational decisions. Seventy-nine percent of family businesses have some form of governance policy or procedure in place—down from 84% when we asked the same question in 2018."
Action items?
Professionalize family governance (while understanding that families are dynamic)
Write down values
Allow external help
Family Business Succession Planning Opportunities (The CPA Journal)
+ A no-nonsense guide to succession planning options, including gifts, family limited partnerships, equity recapitalizations, employee stock ownership plans, and more. "Although family-owned businesses are responsible for 60% of jobs in America...only 15% of them have anything resembling a succession plan in place. Furthermore, businesses have a difficult time surviving through multiple generations; just making it to the second generation is a milestone event; only 30% make it through the second generation, and just 12% make it through the third."
The Throne or the Kingdom: The Founder's Resource-Dependence Challenge (Noam Wasserman)
+ We quoted this piece in our essay, but it bears repeating: "Startups in which the founder is still in control of the board of directors and/or the CEO position are significantly less valuable than those in which the founder has given up a degree of control. On average, each additional degree of founder control reduces the value of the startup by 23.0%-58.1%."
A Short History of Succession-Planning Disasters (Quartz)
+ A little extra motivation to reduce owner dependence early. "Under Belichick, and with the talents of quarterback Tom Brady, New England has won six Super Bowls. The Jets have yet to win another since their lone championship in 1969." (See also, King Lear.)
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