Creating a Transferable Business (Part 4)
Mel B. Bannon
In our last article (Part 3 of this series, September 2016) we spoke about the less dependent a business was on the owner for smooth and profitable operation, the more valuable (thus transferable) the business becomes. Executive development and delegation of responsibilities is a critical step in reducing dependency. In preparing for the ultimate transition, the process should begin well in advance of any business transfer. We introduced the Owner Dependence Index Survey as a tool to assist you in determining to what extent your business may be (too) dependent upon you, the business owner. The survey helps with identifying what areas of management you can address in order to improve the value, marketability, and transferability of your business.
In a recent release of findings from an ongoing research effort being conducted by Pinnacle Equity Solutions, Inc., a national leader in the emerging field of business transition planning, it was revealed that business owners, on average, score 53 percent in terms of the level of dependency that a company has on their individual efforts. Generally speaking, the more dependent a business is on the efforts of the owner, the harder it will be for the company to transition to a new owner. We will discuss these findings here and provides insights for owners of privately-held businesses to learn how to begin planning for your own business transition or exit in the future by knowing more about how dependent your fellow owners’ companies are on their individual efforts.
A National Crisis of Owners Unprepared for Transition of Their Companies
It is broadly realized that the United States has millions of baby boomers who own businesses and will be looking to transition their companies in the next number of years. In November 2015, Pinnacle Equity Solutions launched its latest innovative software survey tool called the Owner Dependence Index™ (ODI), found at odireport.com/Survey/Register/D532A288_40. This seminal tool provides a system for owners and their professional advisors to assess how dependent a company is on the individual efforts of the owner(s) of that company. Pinnacle created this tool out of a recognition that the landscape of baby boomer business owners is full of those who would like to exit their businesses in the near future but do not currently have a plan or strategy to do so.
Because the failure rate of business transitions is so high, Pinnacle sought to examine a key area, Owner Dependency, to better evaluate how to assist owners with protecting and transitioning their largest asset—their privately-held business.
A business owner’s ODI score is an indication of how dependent the company is on their individual efforts. For example, a business owner with a High ODI score, say 80 percent, is someone who is highly involved in their business. By contrast a Low ODI score reflects an owner who has hired and empowered others to oversee and manage significant portions of that owner’s business, amongst other factors. The ODI score is an overall indication of a business’s ability to transition successfully to a new owner. In other words, a low ODI score indicates that an owner has created a transferable business that someone else could own and run with the management team and systems in place today. The ten to fifteen minute ODI assessment includes forty questions that rank a company’s dependence on that owner.
The data presented here indicate the initial results of a few months of the ODI tool being in the marketplace, surveying owners of operating companies who have completed this assessment. The results provide a view through which we all can better understand an owner’s attitude and preparedness for their future business exit.
ODI Survey Results
As mentioned previously, of the business owners who completed the ODI survey to date, the average overall score is 53 percent. The lowest ODI score in the sample was 17 percent and the highest ODI recorded was 98 percent.
High Owner Dependency
The following attributes apply to owners who nationally scored above a 50 percent dependency level. As a group, they generally:
- Are very involved in the day-to-day running of the business
- They do a majority of the hiring, managing, and firing of employees
- Plan for the company’s strategic direction by themselves, with little to no input from others
- Do not share their company results with anyone except their accountant (and what they choose to tell the IRS)
- They are involved in writing checks, running payroll, paying bills, handling accounting
- Are personally liable for the debts of the business
- Oversee the business performance with little delegation or empowerment to managers
- Handle a large portion of the sales and after marketing
- Influence the company’s culture in a material way
These traits vary in degree amongst different owners who completed the ODI survey but are generally true for owners with a high ODI score.
Low Owner Dependency
Owners who score below the 50 percent ODI level generally are much better at empowering others to handle critical tasks within the business and some of these owners have even assembled a functioning board of advisors who hold these owners accountable for certain activities in the business.
How Can You Apply These Survey Results to Your Transition Plans?
As you review the list of traits in the preceding paragraph regarding owners with a high ODI score, you may see many that apply to you. If so, you may begin to consider your own ODI score and whether or not your company is truly transferable to someone else.
The important message to all business owners who are desirous of one day successfully exiting their business is to learn about your own company’s dependence on you, not only so that you can one day turn the business over to someone else at a higher value, but also so that you can, today, enjoy certain freedoms that come from empowering others to assist you in the running and managing of your privately-held business.
These are important considerations and changes that you can control today so that you can plan for a successful and profitable transition of your company in the future.
We hope this helps you understand what your peers are thinking and doing for their exit plans so you can better define your own.
Mel B. Bannon, CLU, ChFC, RFC is a registered representative of Lincoln Financial Advisors, a broker/dealer, member SIPC, and offers investment advisory service through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor, 31111 Agoura Rd., Ste. 200, Westlake Village, CA 91361 (818) 540-6967 or 1500 W. 33rd Ave., Ste. 210 Anchorage, AK 99503 (907) 522-1194. Insurance offered through Lincoln affiliates and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances. Exit Planning offered through unaffiliated third parties. AK Insurance License #19665
This article first appeared in the December 2016 print edition of Alaska Business Monthly.
More in this series by Mel B. Bannon:
Creating a Transferable Business (Part 2):How does my company’s dependence on me impact my transfer options?