Management – Page 2 – Income Mixology

What Are the Best Absentee Businesses? Some businesses are conducive to being run absentee and others are not. In this article, we’ll take a deeper dive than simply calling out vending machine routes and laundromats. The highest performing absentee businesses are the ones in which the owner does not "go into work" but remains engaged and leverages their time to improve performance and increase value. The best absentee businesses may just be the ones that an owner transforms into an absentee business. We’ll examine these topics. What’s the Catch With Absentee Businesses for Sale?Benefits of Absentee Business OwnershipRisks associated With Absentee OwnershipCharacteristics of Businesses Conducive to Absentee OwnershipRange of Owner InvolvementTransition to an Engaged Absentee OwnerOwning a Portfolio of Semi-Absentee Businesses What’s the Catch With Absentee Businesses for Sale? If you’re excited about the thought of absentee businesses, hopefully the business person in you is also thinking “what’s the catch.” You’re savvy enough to know that nothing is free in life. There is a lot of work and planning to pull off absentee ownership the right way. High performing absentee businesses are rarely for sale and when they sell, they draw more attention and sell at higher multiples. This means more time spent searching for well-run absentee businesses, more competition to acquire these businesses, and a significantly longer payback due to the higher selling price relative to earnings. Here’s the catch with many absentee businesses for sale: may not be available in your areaare in high demandsell at higher multiples, thus a longer return on investmentneglected by the absentee ownermore complicated or riskier than you desirenot interesting to yousignificant capital to own multiple locations Benefits of Absentee Business Ownership To the extent an owner can put less time working in the business, the more time the owner will have for other things. Here are the benefits of absentee ownership grouped as time or money. See this discussion of the relationship between time and money. Time MindSpiritHealth and exerciseFamily and relationshipsHobbies and recreationRelaxationVolunteering Money Business strategyAcquire other businessesSynergize a portfolio of businessesMaster converting businesses to absenteeHire staff that can help multiple businesses Risks Associated with Absentee Business Ownership Since absentee business listings are pricier and have more buyer competition, your quest for an absentee business should expand to businesses that are not absentee but have the potential to be absentee. As you broaden your scope in this way, you’ll be thinking about what needs to be addressed to make a business absentee. The first place to start is by identifying the risks within a business that you want to convert to absentee. Simply ask this question: “What are the risks when I step away from the business? What are the risks when I step away from the business? Here are some of those risks. Inadequate owner engagementRisks in delegating critical functions (finance, payroll, etc.)Lack of remote access to systems and trackingLack of leadershipLack of critical labor redundancyLack of processesLack of checks and balancesLack of proper incentivesLack of employee “ownership”Customer confidence in your businessSupplier and vendor confidence in your businessDeterioration of culture or moraleEmployees feel they are making the owner rich Lack of non-competesLack of sufficient legal protections Characteristics of Businesses Conducive to Being Run Absentee Entrepreneurs searching for absentee businesses should look for the following characteristics or potential in these areas. Examples of absentee businesses exist in the industryLabor cost to replace owner is well-knownTalent to replace owner is availableSuccession planning and execution is in placeProcesses are in placeChecks and balances are in placePerformance metrics are in placeBusiness advisors are used to working with key employees versus the ownerBusiness does not rely on owner’s expertise or relationshipsBusiness used to be run absentee Many businesses cannot be run absentee until the owner goes through a series of steps or phases of ownership. First, the owner must run the business like the previous owner, then learn how to replace themselves, learn how to scale and build redundancy, and implement systems that will enable less owner involvement in the future. Business That Are Difficult to Run Absentee Businesses not conducive to an absentee model include knowledge-based businesses, businesses requiring specialized expertise, businesses where key customer relationships reside with the owner or partners, engineering consulting firms, wealth management firms, small law firms, and businesses with high customer concentration. Many of these firms are better suited to strategic buyers in an acquisition or merger. Businesses with strong intellectual property that include unique and proprietary processes and technology are also difficult to run absentee. The organizational structure has to balance specialization with redundancy. The owner must determine the pros and cons of a hiring a general manager or COO with full and complete knowledge of operations. The owner must balance absenteeism with protection of intellectual property and guard against developing future competitors from within. Range of Owner Involvement The level of owner involvement in a business can run the spectrum from fully involved to not involved at all. The owner’s involvement can be in business activities that keep the business going, or strategic activities that protect and grow the business. Let’s define some of these levels of involvement. Owner Operator: works full time in the business in one or more functions and rarely works on the businessDistant Absentee: not involved at all, acts like passive investor whether they own a portion or 100%.Absentee: handles critical functions like payroll, key hires, key purchases, does not do strategic workEngaged Absentee: mostly works on the business, only works in the business handling critical functionsPortfolio Manager: works on the business and develops synergies within the portfolio The owner operator is the most common type of main street business owner. They stay busy working in the business and have little time for, or interest in, strategy, planning, growth and even risk mitigation. The disengaged absentee is the least common with the exception of passive investors in businesses larger than main street. Owners should not give up critical functions like hiring key personnel or making major purchasing and investment decisions. Most main street absentee owners are smart enough to not completely delegate finances. Many owners have ambitions to grow the business, which requires actively working on the business, not just in it. The owner capable of doing this is what I call the engaged absentee. While absent from the day-to-day, they are engaged in critical functions and strategic decisions to protect and grow the business and look for new opportunities. Most absentee owners are semi-absentee. There are potential pitfalls with complete absenteeism, including: Loss of controlProne to theftGrooming future competitorsLimited ability to growLack of cultureOverlooking risksLack of attention to threatsDisrespect for the owner/s Transition to an Engaged Absentee Owner I always recommend that business owners spend at least six months working full time in the newly acquired business before transitioning to become a passive owner. This is especially true if you acquired a business where the previous owner was absent or part-time. In those cases, you’ll likely uncover opportunities overlooked by an owner who was on auto-pilot. Depending on the business complexity and track record of consistency, six months might be too conservative or too aggressive. If the business has employees, you’ll want to spend time in the business just to establish yourself with the staff. If you have a person in charge like a manager or general manager, you’ll want to learn their job while assuring them their position is safe. In these six months, observe, learn, and take notes. Try to avoid the urge to make non-urgent changes within six months. This requires that you purchase a stable business. The transition from one owner to the next is critical. As part of the acquisition, you can offer employee retention bonuses for employees who stay with the business six to twelve months after the sale or whatever time period you need to ensure continuity. And if you will transition from active to semi-passive owner not too long after you own the business, consider the impact of your staff going through these back-to-back transitions. Successful absentee owners will carve out time for themselves and their other interests. Ambitious absentee owners seek to utilize their extra time to grow the business via strategic planning and synergistic opportunities. I call this the engaged absentee owner. The diagram below shows the progression from owner-operator to an absentee owner to an engaged absentee owner. A business owner who desires to be absentee should retain critical functions and accept being being semi-absentee versus fully absentee. Owning a Portfolio of Semi-Absentee Businesses A savvy owner can develop synergies across businesses and own and operate a portfolio of semi-absentee businesses. At this higher level of absentee ownership, the portfolio owner may be working full time despite being semi-absentee at each business. Once the engaged absentee owner excels at what they do, they can take the next steps to acquire and grow more businesses if they desire. They become expert recruiters and leaders of general managers. Financial investment firms do this, and some individuals, main street business owners, and franchise owners do this as well. They develop the skills to be successful absentee owners who can scale absentee businesses and eventually own and run a portfolio. Those skills include: Hiring, training and leading managersImplementing checks and balancesDeveloping synergies across businessesCreating a culture of employee ownershipIncentivizing and enabling ideasShowing employees the owner’s value despite lack of day-to-day presenceMaking employees feel they are part of something largerPersonnel development and mobility across companies Ambitious absentee owners can create a portfolio by finding opportunities with synergies and implementing systems, management, and advisors across several businesses. Engagement is important, so the owner is well served to make appearances, connect with employees, and drive culture both personally and through key staff members. While portfolio owners may be absentee with each enterprise, they may be full-time overall.