Dependencies create risks for business owners. Some take longer to resolve than others, but there are manageable practical steps you can take to tackle dependencies and build a stronger foundation from which to grow your business.
Recent research* undertaken by Haines Watts shows that many business owners are banking on their business to fund their retirement but these same business owners face a number of issues which threaten the long-term value of their businesses. These include:
- Dependence on one major customer
- Dependence on one major supplier
- Dependence on key employees
- Dependence on the founder
Dependence in these areas creates risk for the business as a whole and can seriously impact your retirement plans. How can these be addressed moving forward?
Dependence on suppliers and customers is common and the issue is usually that you are so busy actually doing the work that you do not have the time to review existing relationships or find new customers and suppliers. Making time is one thing but ensuring you have the best people in place to support you can make all the difference. Dedicated sales people can be a valuable asset in developing your supplier and customer base. Protect your business by agreeing longer notice periods in your contracts so you have more time to find replacements should staff leave the business.
Key employees can be the answer to your retirement or they can spoil it quite easily. If a key employee leaves can they take customers or other employees with them? Build provisions into employee contracts which prevent them from competing with you or taking customers and employees.
On the other hand you want to keep valuable talent. How do you incentivise staff without handing over control of your business? Consider development programmes which offer the prospect of promotions or shares and ultimately ownership in the business.
Dependence on you as the owner is risky but quite often could be rectified through small yet effective changes. If you are planning your retirement and hoping that certain key employees will take over and buy you out then they need to start taking on management responsibilities. Employee incentives will encourage them to do this. Quite often a lot of your money is also tied up in the business and you should consider getting some of the cash out now prior to retirement. This can be achieved in a number of ways such as re-financing with the bank, the company buying back some of your shares or getting a new investor to purchase some of your shares. Getting an investor to come into your business does not always mean you lose control and it may be a very good option to release cash.
Dealing with dependencies is key for building business value. Reviewing contracts, shareholder agreements and terms of employment on a regular basis are important. Incentivising employees while protecting the business through a company constitution are also key strategies that can help build a stronger business.
*The Haines Watts Research is based on interviews with 514 owners of UK businesses, which are at least two years old, have a turnover of between £1 million and £50 million and have between 10 and 249 employees. The study was conducted in 2016.