Selling Your Company and the Irreplaceability Paradox
An old rule of thumb is that if you want to succeed in business, you should make yourself irreplaceable. Whatever the merits and demerits of this strategy might be in some work environments, if your objective is to sell your company, irreplaceability is often a major drawback that can scare investors away from otherwise great companies and prevent deals from going through.
Regardless of its merits in some work environments, irreplaceability is often a major barrier to selling a company.
The Concept of Irreplaceability
One strategy that some people adopt at work to strengthen their position at a company or with a client is to make themselves irreplaceable, a situation where it is very difficult or impossible to find a person who can do a job in the same way that they can.
Irreplaceability refers to a situation when it is very difficult or impossible to find a person who can do a job as well as another person can.
There are two sides to irreplaceability, positive and negative. On the positive side, irreplaceability may be the consequence of unique talents that a worker has or special relationships that have been built up over many years due to excellent work or other strong personal or professional bonds.
On the negative side, irreplaceability can be achieved not because of a specific skill but rather due to a person working in such a way that it is hard for other people to replicate that person’s work. This difficulty in replicating another person’s work might arise due to the facts that:
-information that is vital to how a firm functions may be “in a person’s head” rather than set forth in a place that other people can easily access
-a client relationship may be developed in a way that a client is really the client of a person rather than a client of a firm
-the status of firm or work matters may not be reported so that other people can quickly react to business opportunities and risks.
The Irreplaceability Paradox
Regardless of how useful irreplaceability may be for securing and maintaining a position in the workplace, if you are interested in selling your company it is a major drawback. Many investors will not invest in companies with strong irreplaceability components and if they do, they will generally discount the purchase price significantly because of them.
There are three key reasons for this:
–Company Value Risk. The first reason, not surprisingly, is that if you are the only one who can do certain work or maintain relationships with clients or third parties that are vital for a business, once you are gone investors will not be able to effectively run the firm, firm value will be lost and investors will lose money.
–Scalability Limitations. The second reason is that investment returns often heavily depend in private investment transactions on a company’s growth. Companies whose key value drivers are organized into invisible and irreplaceable silos are often extremely difficult if not impossible to scale.
Companies whose key value drivers are organized into invisible and irreplaceable silos are often extremely difficult if not impossible to scale.
Investment Exit Limitations. The third reason is that most financial investors in a company do not make an investment with the objective of holding an investment indefinitely. They often invest with the goal of retaining the investment for a fixed period of time, such as five or seven years, overseeing a company’s growth, and then selling it. Companies with high irreplaceability components are extremely difficult to resell farther down the road.
Overcoming the Irreplaceability Paradox
Keeping in mind these issues, persons who are interested in selling their companies should strive to put in place work methods to avoid high degrees of irreplaceability or the perception of irreplaceability. This involves several practical steps.
Information Access. The first step that a business can take to avoid irreplaceability is that all key firm information should be stored in a place that is secure and easy to access. Ideally, vital information should be stored in more than one place or have appropriate back up so that technological breakdowns or human error will not cause this information to be lost and firm business operations to be affected.
Work Method Standardization. The second step that business owners can take is to ensure that work methods are, to the extent possible, standardized and publicized within a firm. Work approaches should be reduced to written form that people new to the firm can, with appropriate training and experience, review, understand and replicate.
Client and Third Party Relationships. The third step that business owners can take is to structure client and key firm third-party relationships so that they are with a firm rather than a person. This involves:
-Making sure that client and third-party relationships are set up through intake procedures that are defined by the firm and involve the participation of more than one person
-Structuring client and third-party relationships so that other firm members are brought in to the client relationship at appropriate times so the client understands that client work product is the effort of more than one person
-Creating a culture of firm and client integration so that over time client relationships become deeper across the firm.
Irreplaceability can significantly reduce the chance of selling your company or reduce the purchase price that buyers are willing to pay for it. To avoid these sale limitations, long before selling a company business owners with company sale strategies should put in place policies and procedures that ensure that a company ownership transition will not result in operational or financial lapses or losses that will make a company less attractive to potential buyers.
This article was written by Darin Bifani – ONEtoONE Partner in Chile.
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