How to Discern If a Business is Over-Reliant on Its Owner

Tips on how to figure out if the SMB you want to buy is over-reliant on the Seller/Selling Owner – One of the biggest risks in purchasing a business!

Buy something from the business if you can. See if you touch the owner at any point in the normal sales process. Now buy a 2nd time and ask for something custom, a policy exception, or a discount. See if employees can handle the curveball or if they run to the owner.

Read every review on every review platform. See if you see the owner’s name mentioned in the review. Seeing the owner’s name on 50% or more reviews is a major red flag. ????

One of my Sellers had their best sales month ever when they were in Belize for a month unplugged- this was one of my favourite selling points to make to Buyers worried about over-reliance on the Seller.

See if you can shadow the owner for a day of remote work. If their day is full of panicked employees calling and asking them what to do, that’s bad. If their day is them running payroll and ordering inventory and boring financial/ownership stuff, that’s good.

 

 

 

 

 

 

 

 

Some owners make it impossible to steal from the business, but that potentially has a downside of an owner bottleneck. Good ones and trusted employees could steal, but it would be impossible to get away with it. Ask them about theft history and potential and how they manage it.

Ask what trade shows they go to and who goes from their company. If only the owner and their spouse go yearly, this could be a major problem as an owner might have all the critical industry relationships. I like to see teams that go with multiple leaders when applicable.

Dig into the reason for the sale. If it’s burnout, a dad tired of missing his kids’ ballgames, or a mom feeling guilty, that’s not a good sign. A well-run company has owners that go to all their kids’ games. So ask about their kids and their relationship with them. Dig in here.

If you can talk to any managers (not always possible), they’re a gold mine. Ask, “what does the owner do you wish they would stop doing?”

The long, interesting list of addbacks on Broker’s recast can be a red flag. This means owner uses a small and medium-sized business like a personal piggy bank and likely doesn’t have financial controls in place, and all employees are clueless about the $$ aspects of the biz, as the owner and CPA have a “black box”.

Look for awards and accolades on your tour and in the CIM. Do the awards say the company name or the owner’s name? Look at the “About Us” on the website. Is the owner 80% of it? 20%? 0%? 20 or 0 is my preference if buying.

Speaking of the website, I like to see delegation here. Suppose an owner is the only one that updates the website or has admin credentials on CRM, website, etc. That is a sign that they don’t train and delegate important things or trust their team.

Get an employee list that has position and TENURE for all W-2s. I like to see a mix of tenure. Everyone having worked there 20+ years is a risk; they’re overly loyal to the status quo and Seller, and of course, all new could mean the owner runs people off, and the culture sucks.

small and medium-sized business seller

This one’s a little “woo-woo” but ask Seller if they take personality tests like DISC, Enneagram, MB, etc and what they are. If they have a great answer here and seem self-aware of their strengths and weaknesses of personality traits, that’s a great sign. Big blind spots, bad.

Ask the Seller in what ways they are potentially holding the company back from reaching its fullest potential. Thoughtful, vulnerable answers here can tell you a lot. A good Seller shouldn’t take an extreme end-of-the-spectrum stance and answer with nuance explaining their pros/cons.

Does the Seller in almost always open or close the business at the beginning or end of the day? That’s bad. Both are super bad. I love it when the Owner pops in and out randomly, and employees never know when they’ll be there. That says a lot.

Pull out a piece of paper in the seller meeting with columns for seven days of the week and ask them to walk you through what they do on a normal week and fill it in like a calendar. If they struggle to articulate and say, “every day is different”, that’s a bad sign they’re the fireman…

And reactionary with a chaotic culture. If this activity is easy for them or they pull out their phone and show you repetitive standing rhythm and their typical week looks pretty boring, that’s a great sign! The more boring and routine, the better.

Ask about their favorite business books and if they have tried the EOS system or read “Clockwork”, “Built to Sell”, “The Ultimate Sales Machine”, etc. If they have good answers and work on their business as a tinkerer, that’s good. “I don’t have time to read…” is bad.

What other tips and tricks do you have to evaluate owner-reliance in an SMB acquisition?

I would love to hear them!

-Clint Fiore

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