Absentee Owned Businesses in South Florida
When it comes time to selling a business, it is very helpful to understand to what degree the business is absentee owned, and how the degree of absenteeism will affect the sales process. A totally absentee owned business is very unique because the owner has managed to create (or inherit) a successful business enterprise that basically runs itself without their day to day involvement. Most business owners 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. An absentee business owner owns the company but does not participate in its day to day operations, instead using managers or automated systems to run the business.
Characteristics of an Absentee Owned Business
- A truly absentee owned business runs itself, and the owner does not have any day to day operational role.
- Absentee owners 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 is to whom the employees report.
- The absentee owner, however, should 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 the owner is not required on an ongoing basis.
- When it comes time to sell, 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 is trained to take over the role of the seller. A buyer of an absentee owned business is in a very enviable position because there is almost no transition period! If 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 more employees or by virtue of the buyer’s own labor – the profits that the business derives is given a premium valuation. A buyer of an absentee-owned business also does not face the risk of business disruption after the sale due to the seller’s eventual absence.
Example of Valuing Absentee Owned Beauty Salon
- 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 an adjusted owner benefit (or true economic profits to the owner) of $100,000/year.
- Salon B is also generating an adjusted owner benefit of $100,000/year, but the owner of Salon B actively works in the salon as a hair stylist.
- About half of the sales from Salon B comes from the owner’s clients.
- 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/year of economic profit that Salon A generates is more valuable to Jill, and she will likely pay a 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. Although a semi-absentee business owner is still an integral part of the business (unlike a true absentee owner), they still delegate 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 after the closing. The greater the degree to which a business owner is absentee, the greater the valuation of the business.
Prepare Your Business To Sell: Become More Absentee
A key aspect of preparing a business to sell for the best possible price is removing the owner’s role as much as possible from the day to day operations of the business. Delegating responsibility to managers or otherwise setting up the correct policies and procedures to make the business more absentee-owned will greatly enhance the valuation. Implementing such steps may be undesirable for certain business owners, which is entirely understandable. But if a business owner is willing to face increased costs in the short term by reducing their own role in the business, then they are far more likely to receive a premium valuation for their business. Additionally, a transitional plan should be set up whereby the seller agrees to give the buyer a training period in order to help ensure a smooth transition.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.