Most business owners wear two hats. One as the visionary determining the long-term objectives for the business, the strategies to achieve it and the values it needs to adhere to. The other as the implementor responsible for implementing the strategies, ensuring the business and its people adhere to the stated values and ensuring that the business achieves the stated long-term goals.
Given these dual roles, business owners need to decide how much of their time should be allocated to each role. Many business owners spend considerably more of their time working in the business than they do working on it. This piece questions whether that is a sensible allocation of time.
Determining how best to allocate your time involves some math. You need to consider how much value you can generate for yourself and any other shareholders by working exclusively on your business. Once you have estimated that figure, you need to estimate what it would cost to engage others to do the work you would otherwise have done working in the business.
Start by estimating the extent to which you could increase dividends and the value of the ownership interests in your business. For example, if your business is generating $3 million in annual EBIT and commands a 4-times value multiple, it would be valued at $12 million. If by working on the business you believe that you can increase EBIT by 20% and the increase the value multiple by 1 point from 4 time to 5 times, the value of the business will increase by $6 million to $18 million ($3m x 1.2 x 5). (Note: Since the cost of increasing profits and value will be included in the EBIT figure, those costs will not need to be deducted from the expected benefit. If additional capex is needed to increase profits and/or the value multiple, this cost needs to be deducted from the amount of capital appreciation.)
In this example, assuming no additional dividend and no additional capex, the value the business owner would expect to add to the value of his ownership interest by working on the business is $6 million. For ease of comparison, it may be useful to state this value on an hourly basis. Assuming a 47-week working year (4 weeks annual leave and 1 week equivalent of sick leave) and five 8-hour days per week, the $6 million benefit equates to $3,131 per hour.
The next step is to consider the additional costs of delegating to others tasks you would otherwise have done. Where you are spending your time working on the business, it is likely that you will need to employ or engage someone else to do the work that you would otherwise have done or add to the responsibilities of one or more existing personnel. This comes at a cost, which needs to be estimated. Since it is likely that you would delegate tasks to various people on different salary packages, you will need to estimate the average cost of engaging those people. In doing so, it may be useful to consider their cost (of taking on tasks you would otherwise have done) on an hourly basis. Using the same assumptions as set out above, the hourly cost of a person on a $500,000 pa package is $266 per hour and that of a person on a $150,000 pa package is $80 per hour. It is worth recognising that the cost of engaging another person to complete tasks you would otherwise have done, can vary enormously depending on whether they would be employed full- or part-time, whether the tasks can be completed online and whether the job needs to be done during HQ office hours.
Once you have estimated the costs of delegating the tasks you would otherwise have done, you will need to include them in your EBIT projection.
Since the owners of most privately owned businesses have the potential to generate significantly more value by working on their businesses rather than in them, it is probably worthwhile for you to go through the exercise of determining where best to spend your time.
If, as would be expected, you conclude that you can add considerably more value by working on your business than in it, you will need to devise a strategy for making that transition.
This is more challenging. It is however worth mentioning that as regards many jobs, there are levels of delegation, which enables you to progressively transition from doing the job yourself to ultimately delegating full responsibility for it to someone else. In other words, one seldom goes from doing the job yourself, to delegating full responsibility in one step. Progressive delegation is invariably preferable. The rate of that transition could be a lot quicker on some tasks than on others. Since the level of risk is also likely to vary between tasks, the delegation of some tasks requires more caution than on others.
R&M can assist business owners with this exercise. It can help business owners determine the value they could potentially add to their businesses by working on it, rather than in it, and can assist them determine the associated costs and help them devise strategies to transition from working in their businesses to working on them, and to manage associated risks.
Here is a link to R&M’s Advisory webpage, which provides more information on what it offers, why and how it goes about its business – https://www.rogersmorris.com.au/rm-advisory/ . An email address is provided for those who would like to explore what R&M can do for them.