How to make your business worth more without you…

“My business is my identity”. *

“My business is my superannuation”.*

*Quotes from proud small business owners

What does reducing key person reliance mean to you?

A business that relies heavily on its owner is not as valuable as a business that is not reliant on its owner. Many business owners don’t understand how reducing or minimising the risks of key person reliance can significantly improve 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 Profit$200,000$200,000
Business Cap Rate**3.053.5
Business Value**$610,000$700,000
Value Improvement$90,000
Improvement 14.75%

**Business Value determined by Bstar’s Bank Accredited online Business Capitalisation Rate Calculator

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.

What can you do to reduce or minimise the risks of key person reliance?

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

StrategiesAction
Business1. 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 ManagementThe 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 reliance on your business by completing an online business valuation. Your Accountant or Financial Planner 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.

Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in this article. Prosper Advisory accepts no responsibility for any loss suffered as a result of any party using or relying on this article.

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