This is Episode One in our ten part Series on Driving Business Value.
This week we focus on key person reliance, or key-person dependency, and how it diminishes the value of your business – and what you can do about it.
Let’s start by defining it: Key person reliance is when any one individual in, or related to, an organization is relied upon too heavily and have become too important. The risk is if something were to happen to them, the business would run into trouble.
Four Types of Key Person Reliance:
- Team member
Let’s start with SUPPLIER DIVERSITY:
Do you have multiple ways to get the products and services that you need to conduct business? If you don’t, and if you only have one major supplier that you’re relying on, that’s going to be a risk factor for a buyer.
If anything happens to that supplier – they go out of business, they stop providing the product or service, or any number of scenarios, it’s going to prevent you from being able to serve your clients.
Consider how you can have multiple sources to get what you need to do business.
If you have any one customer that’s worth more than 20% or 25% of your overall volume, that is a red flag for a buyer. It diminishes the business value because if that customer went away – again either by going out of business, finding a different provider, or no longer needing your product or service, all of a sudden 25% of your revenue, and maybe even a higher percent of your profits, are going to be gone.
Make sure that you have enough clients that you don’t need to rely on any one client or customer so heavily. Keep that ratio below 25% for your biggest client.
Do you have of any one member on your team that is so important in terms of their ability, or their technical knowledge, or even their external relationships with customers that if they were to leave, the business would be in trouble?
Invest the time to capture the knowledge your key people have into systems, documentation, and training. If a key person were to leave, then you have that information and can more easily and smoothly train somebody else.
OWNER WITH ALL THE ANSWERS:
This means you, and this is a major one, which is why I left it to the end!
Think about this from the buyer’s perspective. They want to buy a business that’s going to be an asset and is going to be sure to give them a return. They don’t want to buy a job, so the business has got to be able to run without you.
And this is probably the biggest challenge, because as the founder, you may have built the business around you, and remained the person that has all the answers and owns all of the key customer relationships. The more important you are to the business, the less the business is going to be valued.
Your next step is to start driving down execution, accountability, and leadership in the business. Your role needs to be more of the ambassador or the chairman – the person behind the scenes that’s making sure that you’ve got a team in place that can execute and grow the business without your day-to-day direction. It’s a bit of a tall order, but it can be done, and it’s necessary to get maximum valuation at time of sale.
If you have any questions about key person reliance and how you can diversify any of those areas in your business, I’m happy to have a chat with you. Just reach out.
Keep an eye out for Part 2 in this series: How your X-Factor increases your business value.
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