When you start your business it can feel that you are doing everything. From being the sales rep, delivering the service or making the product, doing the admin, etc… Gradually as you take on more staff you can hand over some of the responsibilities. A business owner, at this stage, can start to make the business work without them: having an organisation structure, management team, processes, etc.
If you don’t build the “business to sell” you can get stuck in the “owner’s trap”. The trap can be a self-fulfilling loop as showed in this graphic:
Signs you’ve fallen into the trap:
- business slows when you go on holiday;
- customers come to you with problems;
- your growth has reached a plateau.
Businesses stuck in the owner’s trap stressful to run. Also they are worthless because nobody is going to buy a company dependent on its owner.
The following story reveals the downside of selling a business that hadn’t fully broken out of the Owner’s Trap.
Lessons from being stuck in the Owner’s trap
Impres Engineering is a Computer Numerical Control (CNC) machining company specializing in custom machined aluminum products in Grand Rapids, Michigan in the US. If you want a product prototype made of aluminum to pitch investors or would-be customers, Ross Hoek is your guy.
Hoek decided it was time to sell his 16-employee company, after 21 years running his business, with over $2 million in annual sales and $500k EBITDA. He got several offers and settled on one that would pay him $3 million – $2.25 million up front with the balance paid over time.
It all sounded good in theory, so Hoek agreed to the terms and to an employment contract with the new owners. However, within a year, Hoek had stopped receiving the agreed upon payments and had been fired from the company he started.
In this podcast, you’ll learn:
- The special considerations used when establishing the value of a manufacturing company;
- How your equipment can be used to ensure an acquirer pays you what they owe;
- The one thing Hoek wished he’d done when preparing a share purchase agreement;
- How to protect yourself if your deal goes south.
Advice for business owners
One of the reasons Hoek’s business failed under new ownership was how dependent his company was on Hoek himself. Ensuring your business is not dependent on you is one of the secrets to a clean exit. Find out how dependent your business is on you by getting your Value Builder Score now.
Listen to Ross Hoek
Ross was interviewed by John Warrillow, author of Built to Sell: Creating a business that can thrive without you. John is also the host of Built to Sell Radio, a regular podcast revealing the stories and advice of business owners who have sold their businesses. The link below takes you to the full interview with Ross Hoek.