At some point, shrinking the owner’s role is essential for the business to thrive. Overdependence on the owner can be crippling and doom the business to a shutdown when the owner can no longer continue. Likewise, for a company to become more valuable, it must become less dependent on the owner’s efforts.
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Understanding what new owners want
Some find it hard to grasp why the business needs its independence. However, it makes sense when we consider what happens after a company sells.
A new owner does not want to purchase a company to create a job for themselves. They probably have a job and are looking for a somewhat independent running company. If the company is too dependent on the owner, there is a big hole to fill when the original owner leaves.
So how do we make that transition to a smaller owner’s footprint in the practice?
1. Add leaders who enable shrinking the owner’s role
When potential purchasers evaluate what they are purchasing, they consider who will continue to lead the organization. The existing owner may stay on for a while, but eventually, the practice will need new leadership. An organization with a strong leadership team will be more valuable to any potential new owner.
In this post, I have written about fostering future leaders: Build a more valuable practice by nurturing next-gen leaders.
2. Positioning others out front
Preferably, the leadership team needs to become the core of the organization rather than the owner. In addition to building a solid leadership team that will endure beyond the current owner’s tenure, those leaders need to become the face of the organization. Importantly, the internal staff and the wider community need to lean on all the leaders, not just the owner.
However, there isn’t a natural way to achieve this. The owner needs to step back and make space for new leaders to grow into new roles and the experiences they need to accomplish what is needed. The changes will be uncomfortable for both the owner and the emerging leaders. Everyone will feel discomfort until new patterns emerge.
So practically, how does one do that? As time went on, each of our leaders might run a meeting, make an announcement, or roll out a program. In that way, the staff saw the competence of the whole leadership team. With time, the leadership team is perceived as being in charge of all that is going on.
3. Reducing clinical productivity
Shrinking the owner’s role by reducing the owner’s clinical productivity may seem counterproductive. Certainly, at the early stages, that is true. But eventually, the organization will need more focus on administration, leadership, and management than on the amount of income the owner generates for the business. I have written about this changed priority in this post: Reducing in-the-trench psychotherapy to focus on practice management.
This new emphasis on administration, leadership, and management is partly just the next developmental stage of an organization. But additionally, the more dependent the organization is on the income produced by the owner, the less attractive it is to a potential purchaser.
Let’s examine this more closely by looking at the treatment of an owner’s salary once a practice sells.
What happens to the owner’s salary?
As the practice becomes less dependent on the owner, what happens to the owner’s salary? The usual story is that the owner’s salary remains the same as it was during the “highly productive” phase.
So then, what happens upon sale?
As the potential new owner evaluates the company’s financials, the owner’s salary and benefits are added to the net profit since the salary expenses go away upon the sale. The new owner benefits from the old owner’s salary and benefits going away.
But some income also goes away. For example, if the practice depends on the owner’s productivity, the new owner must find a way to compensate for that lost income. For those calculations, see “the owner’s replacement value” in this post: How to estimate the value of a mental health business.
So summing up, once a sale occurs, the expense of the existing owner’s salary and benefits go away, and the replacement cost becomes the new owner’s responsibility. Consequently, the best arrangement for the new owner is when the selling owner has a hefty salary but a small replacement cost. In that scenario, the new owner has a significant expense go away (the old owner’s salary) while needing to make up only a tiny amount of income (what the old owner contributed to income).
Therefore, there is a substantial financial benefit to transitioning to the selling owner doing less clinical work. Added to the practical need for the owner to spend time on administration, leadership, and management, the case is strong for shrinking the owner’s role.
Shrinking the owner’s role is the goal
No one starts practice with the awareness that eventually they will need to work themselves out a job. But indeed, as outlined above, that is the case for both practical and financial reasons. And especially that is true when the owner is planning on exiting the ownership role.
So, develop a plan for all the transitions. Work on what to delegate and to whom. You will not regret it.