The Pitfalls of Absentee Ownership

Absentee ownership is a dream of many would be business owners. Imaginations run wild when thinking of having a business where all you have to do is check in every so often and have money transferred to your personal bank account.

After a recent meeting with the managing member of an absentee ownership group I realized there are (potential) pitfalls, both ongoing and when it’s time to sell. Here are three I noticed:

  1. If it’s not yours, you don’t take as good care of it compared to if you own it. In this case the employees went about their jobs but the building was filthy, the equipment area was a mess, and there wasn’t the pride of ownership. The offices needed a coat of paint, carpets replaced, bathrooms scoured*, and some general upkeep. Given the owners are thinking of selling the business one would think they would spiff it up to make a good first impression.
  2. The above is part of a larger issue and that’s the overall culture. The saying, when the cat’s away the mice will play, is very true. I’ve said for years small to lower middle-market companies need the adult supervision only an owner can provide. I’m not saying the employees won’t do a good job. I’m saying it’s often the little extra that’s the difference between profitable and very profitable, bonuses or no bonuses, career advancement or no advancement.
  3. Finally, unless the business is large enough to attract a strategic buyer the market is limited, at least at the price the owner(s) want (based on the company’s earnings). A financial buyer will have to figure out how to get a salary plus pay for the company. One of the worst things the buyer can do is come in and replace a loyal employee (in order to justify his or her salary).

As the saying goes, it’s always something. Planning and preparation can prevent many issues, like what this memo is about.

“Happiness is not an absolute value. It is a state of comparison.” (Author) Zadie Smith

* This reminds me of a deal many years ago. The closing was at the company’s office, the offices were well taken care of, especially for an industrial business, and the buyer’s wife proclaimed the first thing she would do would be to clean the bathrooms. It’s all a matter of perspective. Industrial office bathroom cleanliness is different than luxury hotel cleanliness.

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