What is an Owner Absentee Business?

Share on facebook
Share on google
Share on twitter
Share on linkedin

Absentee Owned Businesses in South Florida

When it comes time to selling your business, it is very helpful to understand whether or not your business is absentee owned, and how the degree of absenteeism will affect the sales process.  An absentee owned business is very unique because the owner has managed to create (or inherit) a successful business enterprise that basically runs itself.  Most owners do not need to have absentee-owned businesses because they prefer to work and run the business themselves. Others may find it simply too difficult and costly to structure a business so that it can run successfully without an active owner overseeing its operations.

Characteristics of an Absentee Owned Business

  • A truly absentee owned business runs itself, and the legal owner does not have any day to day operational role.
  • An absentee owner may simply “work” an hour or two a month (frequently from home) where the owner may simply monitor the financials or other key performance indicators.
  • An absentee owner does not supervise employees on a day to day basis.
  • There is invariably a manager who has hiring and firing powers over the other employees and to whom the employees report.
  • The absentee owner must, of course, ultimately exert control over the manager or management team.
  • The stronger the management team the stronger the owner is truly absentee.
  • Further, an absentee owner will have no personal relationships with key customers or suppliers.
  • An absentee owner may have created a product or service which gives the business its competitive advantage, but an absentee owner need not be required on an ongoing basis.
  • When a sale occurs, an absentee owner typically is still required to sign a non-compete agreement with the buyer.

Absentee Owned Businesses More Valuable

After a sale, there is typically a transition period where the buyer must step into the shoes of the seller and literally learn to take over his or her day to day operational activities. A buyer of an absentee owned business is in a very enviable position because there is almost no transition period! Where the seller is truly absentee, the business will simply keep running as usual after the sale. Because the buyer does not need to replace the owner (either financially by hiring employees to replace the owner or by virtue of the buyer’s own ‘sweat equity’ of being forced to actively work in the business), the profits that the business derives is given a premium valuation.

Example of How An Absentee Owned Beauty Salon is More Valuable

  • Let us suppose that Jill is debating the purchase of two hair salons in Palm Beach County.
  • Jill is not a hair stylist but wants to actively manage the salon.
  • Salon A is an absentee owned salon generating profits of $100,000.
  • Salon B is also generating profits of $100,000, but the owner of Salon B actively works in the salon as a hair stylist.
  • All else being equal, Jill will be willing to pay a premium for Salon A compared to Salon B.
  • With Salon A, Jill does not need to worry about replacing the owner with another stylist, and incurring the costs thereof.
  • Further, Jill does not need to worry that clients will leave (when the seller leaves) after she purchases Salon A.
  • Even better, if Jill decides to work in Salon A as a manger, perhaps she can replace a current employee with herself (thus saving money), and increase the productivity of the salon by her own efforts as a manager.
  • Thus, the $100,000 profit that Salon A generates is more valuable to Jill, and she will likely pay a much higher price for Salon A as compared to Salon B.

Some Businesses Owners are Semi-Absentee

A semi-absentee business owner may work around 20 hours or less in the business. Such a business owner is still an integral part of the business (unlike a true absentee owner), but still delegates the ‘heavy lifting’ of the business to employees. A business owner may be characterized as semi-absentee if they are easily replaceable and lacking any specific skill sets or relationships that are difficult to transfer to a buyer of the business. The greater the degree to which a business seller is absentee, the greater the valuation of the business.

Prepare Your Business To Sell: Become More Absentee

A key aspect of preparing your business to sell for the best possible price is removing yourself as much as possible from the day to day operations of the business. Delegating as much responsibility as possible to managers or otherwise setting up the correct policies and procedures to make the business as much absentee-owned as possible will greatly enhance the valuation. Implementing such steps may be undesirable for certain business owners, but if it can be done the sales price will justify the investment.

Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.

 

Leave a Reply