Creating a transferable business (Part 2): how does my company's dependence on me impact my transfer options?

• Author: Bannon, Mel B.
• Position: CONSULTANT'S CORNER

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Many owners today are becoming aware that a process exists to help them plan for the exit from their privately-held business. Some of these owners are also beginning to see that the greater amount of dependence that their company has on their individual efforts, the harder it will be to transition to a new owner. This article is written to assist owners with the understanding how their options for an eventual exit can be impacted by how dependent their business is on them. In addition, we will explore a new tool business owners can use to assist them in taking an initial measurement of their own dependence level (Owner Dependence Index).

A Company's Dependence on Its Owner Will Impact Exit Options

Business exit and transfer planning includes identifying what an owner wants most--at both a personal and a company level--and combining that with how well prepared they are to execute on a transition. For example, an owner may want to transfer their business to an outside buyer. However, if the business is too dependent on the owner, there is a risk that the business will not survive in the hands of another owner. In this case, the exit option of an external transfer may be limited. In turn, that may limit the owner's overall ability to transition the company to someone else and ultimately reach their exit planning goals.

Different Exit Options

In the world of private business transfers there are five primary ways that a business can transition to a new owner. The first two options are external buyers (which include competitors) and investment groups that can purchase the business. By contrast, insiders include co-owners, managers, and family members. Internal transfers can consist of a management buyout, an employee stock ownership plan, and/or gifting to others, such as family members or charitable entities. The amount of dependency that a business has on an owner can impact these various exit options in different ways, some good and some bad.

Sales to Private Equity Groups

Private equity groups don't mind high owner dependency too much, provided that the owner is agreeing to work for these investors after the transaction. If the owner dependency level is high, then both parties need to give serious consideration as to how their relationship will be affected after the transaction. They will need to consider that this relationship could exist for a very long time. By reducing owner dependency and by empowering a management...