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One of the biggest small business risks can often start with the owner! In our many years of working with business owners, it’s not uncommon to hear the following:
“My customers will be with me until the day I die”.
“My business is my identity”.
“My business is my superannuation”.
If you agree with these sentiments, it is likely that your business is overly reliant on you.
You might ask, so what?
A business that relies heavily on its owner is not as valuable as a business that is not reliant on its owner. When we talk about small business risks, many business owners don’t understand the risks of key person reliance and how it can significantly impact the value of their business.
Compare the following valuation scenario of the same business when key person reliance is reduced or minimised:
|Business Key Person Reliant||Same Business not Key Person Reliant|
|Business Valuation Multiple||3.05||3.5|
Buyers will pay a higher price for a business that can be easily integrated into their current business or smoothly transitioned to a new principal. They will want some comfort that the business’ key customers and staff will stay with the business once the current owner departs.
There are many different business and risk management strategies business owners can implement to reduce or minimise key person reliance.
The table below provides some suggested examples:
|1. Business Systems: introduce systems into your business. For example, a good quality stock management system will reduce reliance on the owner’s product and services knowledge.
2. Client Relationship Management: establish customer relationship management protocols so staff can manage key customer relationships.
3. Management Succession: invest in the professional development of your key staff so they can eventually share in part ownership (succession planning) of the business.
|Risk Management||The very nature of some businesses means it is difficult if not impossible to reduce or remove key person reliance. A specialist surgeon is an example of an occupation that will always be key person reliant. In this case where key person reliance cannot be removed or reduced the purchase of business insurance is considered an effective risk management strategy.|
Start assessing the impact of key person dependency on your business by requesting a business valuation from your accountant. Your accountant is best positioned to provide advice on key person reliance, business valuation and business and risk management strategies to reduce, remove or minimise the risk from key person reliance.
The team at MGI South Queensland can help you with all aspects of improving your business valuation as well as exit planning strategies and business benchmarking for business growth. Our succession planning services will help you make calm and considered decisions about the long term future of your business. Give us a call on 07 3002 4800 or book a consultation online today.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Readers of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. MGI accepts no responsibility for any loss suffered as a result of any party using or relying on this article.
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