The importance of decentralising a business owner

By Chris St Cartmail, Certified Exit Planning Adviser

For many entrepreneurs, the idea of defining and driving a business forward as its leader, taking a central role in the company’s operations, strategy and decision-making, may seem highly appealing. It may even be one of their main motivations in starting a business to begin with.

At the early stages of a business, this kind of driving force is vital to a company’s evolution and building it up to a point of sustainable success. However, should the company get to a point where its day-to-day operations are too reliant on the owner’s involvement, then this can severely limit its succession options and attractiveness to potential buyers or investors.

Owners are, of course, vital to a business and shouldn’t shy away from exerting their influence on its identity and future growth plans. But, even if the business is profitable, over-reliance on one or two key figures can create major issues should they decide to sell or if the unforeseen happens and they can no longer run the business as before.
Even if the owners aren’t seeking to sell in the short to medium term, decentralising themselves from the company’s operations is a valuable strategic move that can significantly improve the firm’s stability, valuation and attractiveness to prospective buyers.

Issues created by owner dependence

Being dependent on an owner can create numerous issues for a business that can limit its growth potential, reduce efficiency and potentially even harm its workforce. It is key for an owner to set his/her ego aside to manage the scale of an ambitious organisation.

Over-reliance
The most alarming consideration for businesses where the owner is too central to operations is over-reliance. If the business is dependent on its owner to function, then it may be unprepared for a scenario in which the owner is absent.

Naturally, this would be highly damaging to a business when the owner is considering an exit. More pressingly, it could be severely damaging if something unforeseen happens and the owner is no longer able to work and there is not a strong leadership or management team that is able to step in and run the business effectively in their absence.

In this scenario, even if an owner is absent for just a brief period, the business may suffer, but it could prove catastrophic if the unforeseen were to happen and the owner was forced to take an extended absence.

The ironic fact is that ‘unforeseen’ events are actually quite common, and grouped together make the number one reason that businesses get put on the market - and if they do sell, it will be for a sub-optimal value. The most common events are: illness and/or disability, death, divorce and disagreements (between owners or major 3rd party lawsuits). Any of these that afflict the owner has the ability to bring a company to its knees.

Another issue in this regard is that, if the owner is unable to take time off without the business suffering, they are likely to burn out and their performance may be impacted as a result. This may lead to them considering their exit options, but this could prove difficult if they are too integral to the business.

In order to ensure a balance where the business is able to continue functioning without the owner and that they have sufficient confidence in their team to take time off when required, a company would need to break its over-dependence on the owner.

Lack of succession options
For some owners, it may be flattering to think of themselves as being indispensable to their company, but in truth it is something that owners should be sure to avoid. One of the main reasons for this is the nightmare it will create for them when it eventually comes time to exit.

Whatever form the owner’s ultimate exit takes, one of the most crucial things to enable it to happen successfully is a strong leadership/management team working below the owner.

This would effectively rule out an internal succession strategy, such as a management buyout (MBO) or employee ownership trust (EOT), which would rely on an experienced management team stepping up to take over the business when the owner exits.

However, it would also create huge problems for an external sale. In company acquisitions, one of the first things any buyer will look for are strong skills, capabilities and experience within the overall team.

If these things are concentrated with one or two owners, then it will raise red flags for buyers in terms of how the business will perform once the owner exits and how smoothly the integration process will run. At the very least, this will negatively affect their valuation of the company, but it may also be enough to put them off doing a deal entirely.

Ultimately, owners that are indispensable to their business severely limit their exit options and, unless they undertake a lengthy process to decentralise themselves from operations, are faced with either hoping to secure a management buy-in (in which the acquirer is an experienced existing management team, typically backed by private equity) or seeing the company cease operations or be left to struggle on its own without them.

Hampers growth and decision-making
Fundamentally, businesses that are dependent on their owners may struggle to grow. If the owner expends too much of their time and energy on the day-to-day operations of the business, then there may be a lack of focus on growth and evolution. Delegating responsibilities and spreading operational roles around means that owners and their leadership teams can dedicate more of their efforts to the company’s growth and, if they are planning to sell, scaling the business up.

Over-dependence on an owner can also reduce a business’ agility and hamper their ability to make decisions quickly. At businesses where the owner is too central to operations, critical decisions will almost certainly require his or her input and approval.

If an owner is extremely busy overseeing too broad a range of responsibilities, then this can lead to delays and inefficiency in decision-making and create bottlenecks that reduce the company’s responsiveness to market changes.

Narrow leadership
One of the things that marks out many of the most successful businesses is a management team with a diverse array of talent and experience and a significant say in how the business operates and strategises for the future.
Having this can be invaluable to a business owner, providing a depth of experience and insight and a range of viewpoints that can enable improved decision-making and ensure that they avoid tunnel vision.

However, if one or two owners are the only ones guiding the business, then this depth will be missing and leadership may suffer as a result. This could be particularly damaging if the business begins underperforming, in which case it will be relying exclusively on the owner to turn things around.

Concentration of knowledge and relationships
Over-reliance on an owner will also mean that employees below them, even more senior figures, may not have a significant overview of key parts of the business, with knowledge, skills and key relationships concentrated with the owner.

If the business is too dependent on the owner for many of its operations, then this is likely to mean that the rest of the company lacks these skills and staff would require significant training in order to take them on.

Similarly, if the owner is the primary (or sole) point of contact within the business for customers, clients or suppliers, then these key figures will lack a working relationship with other employees within the business. Should the owner leave for whatever reason, they may decide to take their business elsewhere.

In both of these cases, the owner has (perhaps unwittingly) created a situation in which they are indispensable to the business and, essentially, cannot exit without potentially causing fatal damage to the company. Clearly, this is something that would make even a profitable, successful company unappealing to potential investors or buyers.

Staff disaffection
If a business is dependent on its owner, then this indicates that its employees will have less autonomy, experience and responsibilities and may not be trusted by their employer. This is something that would be highly detrimental to employee morale, leading to staff becoming disaffected and their performance suffering as a result.

It will also mean that there is little scope for progression for employees within the company, which would lead to the business wasting staff potential, struggling to retain talented employees and potentially finding recruitment difficult.
In order to ensure a motivated, successful workforce, owners should strive to ensure that employees are trusted, find their work challenging and rewarding and that there is a clear route for them to advance within the company if they perform well.

Types of owner dependence

While a business will typically suffer to some degree if it is overly-reliant on its owner, it is not always an issue that is readily apparent. Even a business that is too dependent on its owner can continue to perform well and, on the surface, appear like it would be an attractive acquisition prospect to a potential buyer.

However, any decent due diligence process on a buyer’s part will quickly demonstrate that a business is owner-reliant and lead either to them putting a significantly lower valuation on the business or moving on to other targets.

Unprofitable and owner-dependent
There are several reasons why a business may be unprofitable and owner-dependent. Perhaps this will be because the business is an early-stage startup, in which case a high-degree of owner involvement and an underdeveloped (or non-existent) leadership/management team is to be expected.

However, in other scenarios, a business may have become unprofitable as a direct or tangential result of owner-dependence, perhaps because the owner’s constant involvement in day-to-day operations means there is a lack of planning for the future and an inability to react to market changes, or because the owner is the only senior figure with significant experience at the company and is suffering due to a lack of support at senior level.

Owner-dependence may also come as a result of the business becoming unprofitable. If profits begin to slide, the instinct for some owners may be to seize control of operations in an effort to arrest the company’s downward trajectory. However, doing so may simply make the problem worse, leading to a situation in which the business is both unprofitable and dependent on its owner.

While this state of affairs may not be immediately alarming to a startup business, where the owner is less likely to be planning an exit, for other companies the combination of unprofitability and owner-dependence renders them virtually unsellable.

To remedy this situation, the business needs to undertake urgent assessments of both its finances and its owner involvement. Perhaps the most pressing matter will be to identify how the business can reduce costs and make revenue gains, before planning how it can reduce the owner’s involvement in order to build a more stable, profitable business.

To achieve the latter, the business must seek to understand the owner’s involvement. What are the functions and processes are they overseeing? How can these be documented and systemised so that the responsibilities can be taught and, ultimately, passed on to other staff as part of a strategic restructuring?

Ultimately, the goal will be to gradually move the company back to profitability while developing or acquiring senior talent, freeing up time for the owner and bringing the business to a point where the owner’s operational involvement is minimal.

Profitable but owner-dependent
In many cases, a business may be successful largely as a result of the hard work of its owner. The business thrived because the owner made themselves indispensable. That is the glory of entrepreneurship.

The problem is that once a business reaches a certain size, owner indispensability morphs into a business risk. The company remains vulnerable to the owner not being able to work, increasing the likelihood of the owner experiencing burnout and severely limiting their succession options should they seek to exit. Many entrepreneurs do not have the skills to manage and grow a sizable organisation.

Fundamentally, despite its profitability, such a business is worth little until it de-risks and decentralises its owner. Again, the requirement will be to assess the owner’s involvement, identify the functions they perform and document/systemise processes where possible.

Alongside systemising and documenting processes, the owner should focus on developing a talent management plan, upskilling employees or hiring skilled workers, gradually delegating responsibilities and, of course, monitoring how the business performs while this process is taking place.

By decentralising the owner, the business should be able to maintain, or even improve, its profitability, while building a stronger, more stable company culture and, in doing so, make itself a more attractive prospect for potential investors or buyers.


Case study: Enhancing business valuation through strategic independence
AQS Robotics (company and founder names have been changed for confidentiality reasons) was a thriving service provider specialising in robotics solutions for aquaculture. The firm, founded by entrepreneurs John and Alex, was highly successful in a niche area and was generating consistent profits.

However, when the owners approached a professional to provide a valuation, they were shocked to find that their company was only valued at £3 million, an EBITDA multiple of 2.5x - well below the 5-6x EBITDA multiples commanded by their competitors.

The primary issue that the valuers highlighted was how reliant the company was on its hard-working owners. John had an integral role in all operational strategies and processes, while the majority of client-facing communication went through Alex.

As a result, the business was seen as vulnerable without its owners, raising major risks for potential buyers and negatively impacting the firm’s valuation. Enlisting an experienced exit planner to enhance the firm’s market value, a comprehensive two-year action plan was formulated to reduce the company’s dependency on its founders.

The first year focused on strategic delegation and process standardisation, with key employees identified and given leadership development training, standard operating procedures (SOPs) developed for the critical business functions and a robust Customer Relationship System (CRM) implemented to distribute responsibility for client relationships to the broader team.

In the second year, the strategy focused on enhancing the company’s performance and expanding its operations, with AQS investing in research and development and undertaking aggressive marketing and branding strategies to boost its visibility. In the meantime, the standardisation of processes was improving the company’s operational efficiency, reducing costs and increasing its EBITDA margins.

At the end of the two-year process, the company’s EBITDA had grown from £1.25 million to £1.7 million, while the overall operation was more efficient and had a stronger, more resilient market share.

With risk reduced and the business more attractive to buyers, the business went to market, leading to a competitive bidding process that ultimately saw the business sold for £10 million - an EBITDA multiple of 6x.

How can owners decentralise themselves pre-exit?

When preparing for the sale of a small to medium-sized business, one of the most strategic moves an owner can make is to decentralise their involvement in daily operations. This process not only enhances the business's appeal to potential buyers by demonstrating a capable, independent team but also helps in obtaining a better valuation.

Below, we explore various strategies that business owners can employ to effectively remove themselves from the day-to-day running of their business prior to a sale.

What does decentralisation entail?
In brief, decentralisation refers to the process of redistributing responsibilities, powers and other critical business functions from the owner to the management team, ensuring that the business can operate successfully without its current owner. This transition is crucial as it reassures potential buyers that the business will not suffer once the owner steps away and that there is a capable team that can aid in running the business post-sale, helping the new owner to acclimatise to the business and, overall, playing an active role in the post-deal transition and integration processes.

Realising the problem
Often, the founder is blind to the centralisation problem. ‘Founder’s Syndrome’ occurs when the entrepreneur fails to see the need to take on outside help - this is one of the biggest barriers to scaled growth. A qualified exit planner will start by sitting down with the owner to get an understanding of their long-term personal and business objectives.

This involves assessing the entrepreneur's vision for the business, including their ultimate goals for an exit, whether it be a full sale, passing the business to heirs, or another form of transition. The planner will review the current status of the business, including its financial health, operational structure, and market position to identify strengths and potential areas for improvement.

A key focus for the exit planner is to align the business’s strategic growth plans with the owner's exit objectives.

Establishing a strong management team
A strong, empowered management team is the cornerstone of decentralising business operations. Business owners should focus on building a competent team that can handle strategic decision-making.

This involves identifying key roles within the organisation and ensuring they are filled with individuals who have the right skills and experience. Owners might need to invest in training and development to bring these team members up to the level required to manage operations independently or, if the timeframe is tighter or existing staff are not ready, recruit experienced senior figures. Again, if the owner does not have the right skillset to build this finely balanced team, they should seek outside help.

Systemising operations and process documentation
Creating systems and processes that standardise operations is another vital step in reducing a business owner's daily involvement. These systems should cover everything from sales and marketing to order fulfilment and customer service. Documenting these processes ensures that they are repeatable and that the team can perform tasks consistently without the owner's input.

This documentation also serves as a valuable asset for potential buyers, illustrating the business's organised and systematic approach and assuring them that there is a framework in place for them to upskill employees and train new recruits once they assume control.

For a more in-depth look at how businesses can harness process documentation to bolster their readiness for an owner exit, check out our insight on scaling up a six-figure business prior to a sale process.

Leveraging technology
Technology can play a significant role in decentralising an owner from their business. Implementing the right technology solutions, such as enterprise resource planning (ERP) systems or customer relationship management (CRM) software, can automate significant parts of the business. This reduces the need for the owner’s constant oversight and allows the management team to take on more responsibility.

A small detail that sometimes gets ignored is to ensure that social media is moved to the company account a good two years before a potential sale. Whilst it can’t be denied that a strong personal brand on social media can really help a company get marketing inertia in the early days, it can become a liability to a fast-scaling business and particularly to one that is about to be sold.

Enhancing financial controls
To further distance themselves, business owners should establish strong financial controls that do not rely solely on their oversight. This might include implementing robust accounting software, hiring or promoting a chief financial officer (CFO), and setting up regular auditing processes. These controls help in maintaining transparency and ensuring that the business continues to operate efficiently in the owner’s absence.

Communicating changes
As the business undergoes changes in leadership and processes, effective communication becomes essential. Owners must ensure that all stakeholders, including employees, customers, suppliers, and potential buyers, are kept informed about changes in management and operations. This transparency helps to maintain trust and stability within the company.

Testing the transition
Before the sale, it is advisable for the owner to gradually step back to test the effectiveness of the decentralisation process. This might involve taking extended leaves or stepping out of the decision-making process for certain projects.

These tests can enable the owner to gauge the preparedness of the senior team to run the business in their absence, identify areas where additional adjustments are needed and reassure potential buyers of the business’s stability under new leadership.

Planning for the long term
Finally, business owners should not overlook the importance of long-term strategic planning in the decentralisation process. This includes setting clear goals for the business that align with the new management structure. Engaging a consultant or an advisory firm can also provide external perspectives and help refine the strategy to ensure the business thrives post-transition.

Decentralising oneself from the business is a critical step in preparing for a sale. It not only increases the business's attractiveness to potential buyers but also contributes to a smoother transition and potentially higher sale price. By investing in the right people, processes, and technology, business owners can ensure that their enterprises are well-positioned to succeed in the future, independent of their personal involvement.

This strategic foresight not only aids in a successful sale but, in a marketplace where deal structures such as earnouts are increasingly common, can also be invaluable in securing the business' success for years to come.


It should go without saying that an owner is absolutely vital to a successful business and, if they are also the founder, they have a key role in developing the business and shaping its future direction.

However, as the business grows, owners should also ensure that they take steps to involve other key figures in the day-to-day running and management of the company, as well as giving them a role in developing its strategy going forward.

This will help the business to develop a depth of experience, strong leadership and a healthy working culture and, ultimately, when the time comes, help pave the way for the owner to make a more smooth, profitable and straightforward exit.

If you are planning an exit, or just want to chat about how to increase the value of your company (whether or not you are planning to sell), please email us at info@business-sale.com, and a qualified advisor will be in touch with you shortly.

Share this article

Latest Businesses for Sale

---

---

---

View more businesses for sale