24 Feb Are You The Wizard of Oz?
When I talk with business owners who are contemplating selling their businesses, I find it many of them have not prepared their business for sale at all and have some very common problems.
The most common problem for small- and medium-size businesses is the failure to build management team. Usually, the business owner started the business or purchased it when it was quite small then built it to a few million in sales and a pretty decent income. One common characteristic that business owners tend to have is that they want to control everything. This characteristic often is manifested in an organization structure where everyone reports directly to the owner. The owner still makes all of the critical decisions, gives out daily direction and usually also does all of the sales and marketing. This renders the business almost unsalable. How can a new owner or manager with no experience in the business possibly become proficient in all of those activities and have the depth of knowledge required to make good decisions so that the business keeps being profitable?
When corporate and private equity buyers evaluate businesses for acquisition purposes, often one of the top items on their list is to evaluate the management team and the owner’s involvement, or should I say lack of involvement. If a business has a hierarchal management structure such that the owner is isolated from all the day-to-day activities and decisions, then the business is much more salable. If the buyer is an entity such as a corporation or private equity firm, then they will have to hire someone to run the business. If the business has a management team then all they need is a seasoned manager with good people skills and good business judgment. If there is no management team, then perhaps the owner or seller might be the only one who can actually keep the company going as it is.
A good metaphor to describe this style of management is “The Wizard of Oz” style. In the famous movie, the wizard was never seen by anyone. And yet, he ruled over the land of Oz by pulling levers flipping switches and speaking through a big loudspeaker system. If a business owner can orchestrate the resources of his business without customer contact, without vendor contact and without being involved in the day-to-day operations just like the way the Wizard of Oz ruled the Land of Oz, then the business becomes much more valuable and marketable.
Transitioning from a sole proprietor with helpers to an established business owner with a good management team does require investment and probably growth. Managers do get paid hefty salaries. Sometimes, the best place to start this transition is marketing and sales. Unless your business is already operating at capacity you can probably grow sales and profits without a lot of additional investment by initiating some lead generation systems. Then you must avoid the temptation to spend the increased profits on lifestyle and instead, you must invest in your business to build your management team and build value.
Lower middle market companies with good management teams and of course, the other characteristics of a well-managed company, will often sell for 5 to 6 times earnings. Sole proprietor businesses usually sell for 2 to 3 times earnings. So you can see that it is a no-brainer to invest in your company, build a management team and grow the earnings to create value. In the end being an entrepreneur is all about creating value isn’t it?