Does Your Business Really Have to Run Without You Before You Can Sell It?

I see a lot of articles these days telling business owners that their company needs to run without them before they can sell it. There are even consulting firms dedicated to helping owners get themselves out of the day-to-day operation.

I agree with the premise. A business that can operate without its owner is generally more attractive and less risky to a buyer. But there is another side to this that gets far less attention.

There are a lot of buyers who actually want to be owner-operators. They aren't looking to buy a passive investment. They want to step into an established, profitable business, run it themselves, and then grow it. For businesses around $1 million in earnings and below, this is an important buyer pool, and SBA financing can make acquisitions accessible to many of them.

So before an owner spends considerable time and money trying to remove themselves completely from the business, I think it's worth doing the math.

Let's say a business generates $800,000 in SDE and could sell at 3x, or $2.4 million. The owner decides to replace themselves with a $200,000 employee and prove for a year that the business can operate without them. SDE is now $600,000, and the owner has also given up $200,000 they otherwise would have earned during that year.

To make up for that $200,000 and still get the original $2.4 million, the business now needs to sell for $2.6 million. On $600,000 of SDE, that's about a 4.3x multiple instead of 3x.

Can eliminating owner dependency increase the multiple from 3x to 4.3x? Maybe. But I certainly wouldn't assume it will.

I completely support owners making their businesses less dependent on them. Better systems, documented processes, capable employees, and fewer responsibilities concentrated in one person all make a business stronger. But I also sell owner-operated businesses every year.

Owner dependency is rarely the only thing buyers consider. They want a well-oiled business that makes money. And many owner-operator buyers are perfectly happy to roll up their sleeves, step into the owner's role, and improve the parts that could run better.

So yes, reduce owner dependency where it makes sense. Just don't automatically assume you need to eliminate your own job before you can sell your business. Run the numbers first and understand who your likely buyers are.

No business sale is easy. If it were, anyone could do it. 😉