Is it really a choice of control or growth for the owner-managers of small businesses?
The market statistics for small businesses seeking investment don’t make for encouraging reading. The main handicap for these businesses is their heavy dependence on the owner. This is corroborated by my own experience helping entrepreneurs exit. Businesses overly reliant on one or two founders are not only more difficult to sell, they achieve far lower prices.
In our industry we refer to the price shortfall as the Key Man Discount (KMD) - the discount to the asking price that vendors are forced to accept to compensate for the reduction in value arising out of the loss of a key person. Various studies have estimated KMD for listed companies at circa 35% and anecdotal evidence estimates KMD for small businesses at 60% plus.
Why does KMD matter if you're not considering selling the business?
One-man bands often resist growth because the owners value benefits such as the flexibility of home-based work, the ability to take holidays during school terms, the "savings" on tax etc. Expansion of the business, they fear, will erode these benefits. They accept the trade-off - higher workload for the owner and lower resilience for the business in exchange for control, flexibility and other advantages.
But, KMD is a drag not just at the point of company disposal; its pernicious effects are not limited to equity events. These effects extend, directly or indirectly, into raising finance, the company's credit rating, how secure employees perceive their jobs to be and, in fact, the owner's own long-term revenue prospects.
Key person reliance affects all three ‘S’ factors; the Scalability, Sustainability and Sellability of the business.
Is there a way to have your cake and eat it, too?
Making the transition from day-to-day management to strategic oversight isn't easy. But for the business owner who can accomplish the move from working in the business to working on it, the rewards are sweet.
They accept the trade-off - higher workload for the owner and lower resilience for the business for control, flexibility and other advantages.
Stepping back gives owner managers space and time to think about and formulate strategy, to look ahead, to spot upcoming opportunities. The kind of things they are probably better at doing anyway.
However, morphing from a doer to a leader can present challenges.
Stop leading the "do" and start doing the lead
How can the owner-manager of a small business make this change? Time to coin an acronym; let's go with ‘PODD’.
Plan: Business owners could start by systematically listing and assessing all the services they perform and the steps or processes involved in those functions. Which jobs can be outsourced, which are best delegated? Can existing staff take on new responsibilities or do new appointments need to be made? How much owner time will it take to oversee the transfer of responsibilities? How best to limit disruption to business through the process?
Outsource: Highly technical and specialised tasks are ideal for outsourcing as are repetitive and mundane tasks. CFOs, MySQL database experts and project managers can all be hired by the hour or day just as lower-skilled tasks can be sent to Fiverr, Elance, Guru, oDesk and Mechanical Turk. Many small businesses have skyrocketed their growth through the use of these and the lesser known MavenResearch, ZipTask, 10EQS and TaskUs.
The outsourced expertise and experience that technology has brought to small businesses, which in my day (here we go!) was only available to mega corporations, is too valuable to leave unexplored. Owners can tap into highly-qualified professionals in almost any field at any time of day or night, and do so at lower cost and without payroll and other overheads. These "employees" are also simpler to hire and fire.
Some of the functions most businesses outsource at the start are accounting, payroll, web design, online marketing, telephone answering and tech support.
When outsourcing, it pays to be specific in requirements and to craft incentives to maintain worker motivation. Risks involved with outsourcing need to be assessed and then contained through proper planning.
Delegate: Delegation is the secret to growth, but it's easier said than done, particularly for the owner who has retained control for a long time. Delegation is a challenge with which most small business owners struggle. But there is help at hand - consultants, mentors and various growth experts are available to provide assistance and some of them are even paid for by the government.
It's often the case that new employees need to be hired. Hiring the right people and helping them grow builds assets for the business. Giving staff more responsibility, frequent feedback - both positive and negative - and reviewing their progress adds to the value of the firm's human capital.
Bear in mind that it's not just the delegation of individual tasks, but the building of a team that's important. There are some investors who specialise in acquiring companies just to get control of their team! (The practice is called acquihire.)
Documentation: Good documentation on processes and procedures can be invaluable. The owner-manager business rarely has a need for recording how things are done and in what order, but these documents play an important role for the growing business. They form a framework of guides and expectations, they make delegation easier and they save reinventing the wheel each time a new employee needs to be trained for a job. A good set of manuals can boost a company's value by several percentage points.
Good documentation starts with the big picture and drills down; it provides context, clear guidelines and explains where discretion is allowed. It's also easy to understand, regularly updated and has built-in checklists.
What to not outsource or delegate
The hiring and firing functions, ensuring legal and tax compliance, signing off major spends, managing the firm's brand and creating or delivering the strategic vision are responsibilities that owners tend to retain through early stages of growth.
Owners achieving the above usually discover that, ironically, they've created more of the freedom and flexibility that they originally enjoyed as owner-managers.
I'll conclude with the words of Tim Ferriss, author of The 4-Hour Work Week. There are strong opinions about this book, on both sides, but Tim has put one thing well: Never do a task yourself that you can delegate. Never delegate a task that you can automate. And never automate a task that you can eliminate altogether.