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Time and money on the scale. Money concept

06 Dec How to Make Your Business More Valuable by Becoming a Passive Owner

One of the most important steps you can take to increase the value of your company is take on a more passive role. When you’re not involved in the day-to-day operations, your business will be seen as significantly more valuable than a business dependent on its owner.

This increased value rings true whether you’re going to keep your business or sell it – a business with a passive owner (in other words, in sell-ready mode) simply runs better, because of the systemic approaches put in place.

And if and when you do eventually sell your business, passive ownership becomes a vital selling point. Your prospective buyer isn’t interested in what you offer to the company. In fact, that’s one of the last things he wants to hear. He wants you to say:

“Here’s this amazing company I’ve built. If I left today, you’d still be able to run this business without skipping a beat.”

When he hears that, your company’s value will soar. Simple as that.

How do you become a passive owner?

There are three fundamental steps to take in order to become a passive owner:

1. Systematize your business – A common mistake new business owners make as they start their companies is to hire new people without writing down any systems of what each job title is responsible for. The very first step you need to take to become a passive owner is to systemize your business.
2. Find your go-to person – Since you won’t be handling day-to-day operations, you’ll need someone who can take the reigns. A Chief Operating Officer or General Manager will be the person who runs your business, allowing you to take a step back.
3. Build trust, and accept mistakes – This one’s easier said than done, but you have to start trusting your employees and allowing them to make mistakes. Let’s discus this one in more detail.

Taking a backseat role isn’t always so easy

For all intents and purposes, you could easily replace the term passive with giving up control. Few business owners relish the idea of giving up control of something they’ve built from the ground up, but that’s exactly what’s needed to make your business sell-ready.

From the onset, you likely were in control of every little detail of your company. There’s a simple reason for that: during the early stages of your company, one mistake could put you out of business.

As you look to shift roles in your company, you have to begin to acknowledge that all of your hard work and commitment resulted in a well-oiled machine where mistakes might still be costly, but they won’t cripple you for good.

If your systems are put into place, and you have a go-to person who can take over reigns, then have faith that your company can withstand the inevitable mistakes your employees will make when every action isn’t examined closely by the owner.

Remember: You are not the most valuable asset in your company

At least, you should hope you’re not. Intellectual property or intangible assets associated with your sale are what will make your business more valuable – while you’re running it as well as when it comes time to sell.

When it comes time to sell your business, you’ll be able to share the methodology behind what makes your company successful, and explain how these buyers can use this methodology to grow into a larger enterprise.

But it’s equally as important to remember that becoming a passive owner isn’t something that’ll happen overnight. It won’t even happen over the course of several months. On average, you should anticipate it taking anywhere from 2 – 5 years to truly build a sell-ready business that will be more valuable to you today, as well as when it comes time to sell.

  • John L. Illes

    The passive owner also enjoys a better quality of life as the company runs itself. The owner can “test” how well the business is being run by taking more vacations and not working the long hours typical of the early days of the business. It is a big step but becoming passive owner creates enhanced quality of life now and a truly sell ready business when the time is correct. Nice article Nate.

    • Nate Nead

      Hi John, thanks for commenting.

      Ultimately, there is a level of trust and ability to 1. Hire the right people you trust. 2. Have the discipline to trust those people with your baby without feeling the need to micro-manage.

  • David Lopez

    Passive or Absentee businesses tend to command a higher valuation multiple than Owner Operator businesses (all things being equal) primarily in the Main Street or Lower Middle Market world. This as Nate points out is due to the fact that most small businesses are dependent on the Owners involvement in the day to day activities and their distinct understanding of the “secret sauce” which makes the business tic. Having the appropriate systems and personnel in place who can continue and maintain the operations of the business are critical so that the Owner can take a step back and to take on more of a Chairman role. Keep in mind that although an Owner can establish protocols and procedures and delegate work to others, there is no better steward for a small business then its principle. The down side for an Owner being passively involved with a business of course is the increase in expenses and thus decrease in earnings, with the upside being realized when the business sells for a higher multiple.